The Center on Budget and Policy Priorities today released Promoting State Budget Accountability Through Tax Expenditure Reporting:

Each year states spend tens, maybe hundreds, of billions of dollars through “tax expenditures.” Tax expenditures are tax credits, deductions, and exemptions that reduce state revenue. They can include everything from poverty-reducing tax credits, to middle-class benefits, to corporate subsidies. Tax expenditures cost state treasuries money in much the same way as direct spending for schools, health care, or road construction. And like direct spending, tax expenditures are a tool states can use to accomplish policy goals.

There is a key difference, however, between direct spending and tax expenditures. States typically require extensive documentation of how much direct spending they do each year, and their budget processes entail evaluation of each item. Tax expenditures usually receive far less scrutiny. For the most part, policymakers do not regularly examine tax expenditures, nor do states document their effectiveness the same way they do for on-budget expenditures.

This is a serious problem. Most tax expenditures are written into the tax code and thus will continue indefinitely — regardless of how costly they may become over time — unless the legislature acts to discontinue them. (Appropriated expenditures, by contrast, typically last only as long as the one- or two-year budget cycle.) Without information on a particular tax expenditure’s costs and benefits, lawmakers cannot make an informed decision on whether its continuation is in the state’s interest.

More broadly, if policymakers, the media, and the general public lack information about tax expenditures, they cannot fully participate in decisions about how to allocate state resources. In fact, in many states the policy debate encompasses little more than half of the state’s total expenditures because expenditures made through the tax code are not part of the conversation.

A state can address this lack of transparency by regularly publishing a tax expenditure report, also called a tax expenditure budget. A tax expenditure report lists the state’s tax breaks and how much each one costs, along with other relevant information that helps policymakers and others evaluate them. …

Forty-four states (counting the District of Columbia as a state) produce some form of tax expenditure report. Unfortunately, many of these reports have significant shortcomings that limit their usefulness.

 

This report lays out best practices for tax expenditure reports — ways to make the reports maximally useful to policymakers and to the public.