In 2011, tax deductions, credits, exemptions, preferential rates and deferrals of tax liability (AKA tax expenditures) available to corporations reduced the income tax revenue flowing to Uncle Sam by about $181 billion, according to a recent report from the General Accounting Office (GAO). That’s about the same amount that the federal government collected in corporate income tax revenue. Tax expenditures available to individuals, including those used by businesses structured as pass-through entities, reduced the government’s income by about $891 billion, the report also found.
Over the past few decades, the cost to the federal treasury of the deductions and credits available to both corporations and individuals has gradually increased, rising from about $700 billion in 1986 to about $1 trillion in 2011. In part, that can be explained by the rising number of tax expenditures that cut companies’ and individuals’ income tax obligations, which increased from 61 in 1986 to 80 in 2011.
Just how many taxpayers took advantage of these tax expenditures? The one most frequently used, the tax exemption of certain insurance companies owned by tax-exempt organizations, was claimed by about 11,750 taxpayers. Nearly 7,000 taxpayers claimed the exemption of certain mutuals’ and cooperatives’ income. The credit union income exemption was claimed by about 3,600 taxpayers.
Two corporate credits and deductions accounted for the bulk of the hit to federal revenue: the accelerated depreciation of machinery and equipment, which came to about $76 billion, and the deferral of income from controlled foreign corporations, which totaled about $41 billion. Neither of these numbers includes the impact on individual tax returns, which came to an estimated $42 billion and $3 billion, respectively. In fact, 56 of the 80 tax expenditures used by corporations also were used by individuals, the report found.
Of course, the fact that many tax preferences and credits can be used by both individuals and companies complicates efforts to reform the tax code, as the impact of any changes would be widely felt. On the other hand, addressing only the tax expenditures used by corporations would limit the amount by which the corporate tax base could be broadened in order to cover a decrease in the corporate tax rate.
Another challenge with tax expenditures is the fact that they tend to lose their visibility. The report notes, “Once enacted, tax expenditures and their relative contributions toward achieving federal missions and goals are often less visible than spending programs, which are subject to a more systematic review of performance, including results.” For instance, the report notes that credit unions were granted tax-exempt status in 1937 because they were similar to other mutually owned financial institutions that also were tax-exempt at the time. However, when these other institutions lost their tax exemption through the Revenue Act of 1951, credit unions remained exempt. The record doesn’t explain why this was the case.
Different areas of the federal government are affected differently by tax expenditures. The two areas hardest hit are commerce and housing, which together are impacted by 15 corporate tax expenditures, the report found. The estimated impact to the two was $96 billion.