"Tax Expenditures" Not What They<br> Are Cracked Up to Be


Posted by Ryan Ellis on Monday, April 11th, 2011, 2:22 PM PERMALINK


70 percent of “tax expenditure” value is used for personal savings, health insurance, housing, state and local taxes paid, and charitable contributions.

There’s a lot of talk in Washington about eliminating some of the $1.2 trillion in annual “tax expenditures” to cut the deficit. Supporters of this approach (like President Obama and Senator Coburn) pretend that this is simply another way to cut spending.  It is not.  Rather, every deduction and credit in the code which is repealed is a tax increase.  Government spending doesn’t go down one penny (in fact, Washington will simply spend the tax hike money).  If a credit or deduction is repealed, it should be replaced either with lower rates, or with new/bigger deductions or credits elsewhere.  That is called tax reform, and it must be revenue neutral.  Below are the biggest deductions and credits politicians talk about when they are referring to “tax expenditures.”  

Having Health Insurance: $317 billion (26% of total)

    Employer provided health insurance: $298 billion (includes payroll tax effects)
    Medical itemized deduction: $10 billion
    Self-employed insurance premiums: $7 billion
    Health savings accounts: $2 billion

Personal Savings and Investment: $275 billion per year (23% of total)

    401(k) pension plans: $68 billion
    “Step-up” in basis on estates: $61 billion
    Defined benefit pensions: $45 billion
    15% capital gains/dividends rate: $39 billion
    Accelerated Depreciation/Small Biz XP: $25 billion
    Self employed retirement plans: $17 billion
    IRAs and Roth IRAs: $16 billion
    529 plans, Coverdell ESAs. & ESOPs: $4 billion

Owning a Home: $134 billion per year (10% of total)

    Mortgage Interest Deduction: $99 billion
    Home Capital Gains Exclusion: $35 billion
    
State and Local Income, Sales, and Property Taxes: $74 billion per year (6% of total)

Charitable Contributions: $53 billion per year (4% of total)    

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