Tax Expenditures Top $1 Trillion for FY2007

Total federal spending in FY2007 was roughly $2.7 trillion, right? Wrong.

Outlays totaled $2.7 trillion. But outlays don't include the all-important category of "tax expenditures," which are the functional equivalent of government spending. Tax expenditures are "revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability." An example is a tax credit.

According to the latest CRS Report on tax expenditures (subscription required):

For FY2007, the Joint Committee on Taxation (JCT) estimates that tax expenditures will amount to $1,034 billion - over six times the FY2007 federal budget deficit.

Now, for a variety of reasons, total tax expenditures can't necessarily be regarded as total foregone revenues (eliminating a tax expenditure may alter taxpayer behavior, tax expenditures interact with each other, etc.). It follows, then, that tax expenditures can't just be added to outlays to get total federal spending. Nevertheless, total tax expenditures over $1 trillion is still an incredible number, especially given our current budget deficit.

It should also be noted that the tax expenditure process is notoriously inefficient, and often results in tax expenditures that overlap or even conflict with direct expenditures. Moreover, current tax expenditures tend to make the tax code more regressive.

The moral of the story: the federal government is more expensive than you think.