After months of secret talks, President Trump and GOP leaders in Congress unveiled their framework for rewriting the nation’s tax code.
By all accounts, the plan would have sweeping consequences for household finances, business incentives and government revenue — likely measuring in the trillions of dollars. The problem is that Congress may pass these tax cuts with no real sense of the impact.
To understand the challenge, it’s helpful to understand that federal spending generally falls into three categories: discretionary spending, mandatory spending and tax expenditures. While these budget items are all of roughly equal magnitude, Congress only has a process of oversight for one of these.
In a normal year, the budget process is designed to help members of Congress keep a close eye on discretionary appropriations. Amounting to roughly $1.2 trillion per year, appropriations (also referred to as “discretionary” spending) are annually passed through a process by which virtually every dollar is designated to a particular program.
The process usually begins with a budget request from the president, followed by a round of hearings hosted by appropriations committees. Federal agencies submit written justification for their requested funding.
At the request of Members of Congress, the Government Accountability Office (GAO) audits the programs, and inspector generals at federal agencies watch to make sure that dollars are appropriately spent. The process isn’t perfect — agencies still don’t have great evidence on the impact of their programs — but at very least, there are several levels of oversight for the outgoing dollars.
Mandatory spending, which includes large health and retirement programs like Social Security, Medicare and Medicaid, is generally subject to less oversight. Unlike annual appropriations, mandatory spending programs are on autopilot. Spending typically rises and falls with a changing economy, evolving demographics and varying needs of beneficiaries— but not congressional approval.
Congress has the authority to create mandatory programs, and those programs are still subject to oversight by agency-appointed inspector generals and the GAO. But by and large, Congress does not control the spending levels each year.
Tax expenditures, by contrast, have hardly any oversight. Simply put, tax expenditures are targeted tax cuts that aim to achieve similar goals as spending programs. Economists across the political spectrum refer to tax expenditures as “spending through the tax code” because, like spending programs, they are designed to achieve some policy goals while also costing taxpayer resources.
In many cases, the value of tax expenditures dwarfs the direct government spending for a similar goal. Over the last year, taxpayers spent nearly twice as much on the mortgage interest deduction than on the whole U.S. Department of Housing and Urban Development.
The tax expenditure budget continues to grow. As Congress realized it was easier to pass a tax cut than to raise spending, tax expenditures have nearly doubled in real terms since the landmark tax reform in 1986 — reaching $1.3 trillion last year.
Unfortunately, the prolonged growth in tax expenditures has not strengthened Congress’ desire for oversight, let alone evaluating which strategies work or how to improve them.
Over the next year, you’ll hear a lot about tax reform and how it may impact you and our country: the state and local tax deduction, incentives for retirement saving, preferential tax rates on investment income, benefits for corporate investment, deductions for people with high medical expenses. This will all change if Republican leaders get their wish and pass the plan laid out last week.
But we have no clear scientific information on whether or not those changes will achieve their stated policy goals. There is no annual review of how Congress spends through the tax code; no inspector general for tax expenditures; no rigorous evaluation of the effectiveness of various tax breaks.
The tax-writing committees can and will hold hearings, and the Joint Committee on Taxation and the Office of Management and Budget will weigh in with a careful assessment of the cost, but no one really knows the economic or social impact of these changes.
Take one familiar example: the mortgage interest deduction — an expenditure costing nearly $400 billion over the next five years. This benefit has been a part of income taxes since the tax code was introduced in 1913, when all consumer interest was deductible.
Over time, interest deductibility was scaled back, but the preference for mortgage interest remained. And while the cost ballooned, no one has ever had to justify the massive cost. There has been no systematic evaluation of whether this is the most efficient way to subsidize homeownership, and Congress won’t know whether the Republican plan, which stealthily cut the mortgage interest deduction by boosting competing deductions, will lower home prices or destabilize the housing industry.
The mortgage interest deduction is just the tip of the iceberg. Taxpayers spend roughly $200 billion annually on various incentives for retirement savings, and nearly the same amount on preferential tax rates for investors.
Smaller breaks, like alcohol fuel credits, cost $10 million per year; film and television production credits cost another $280 million. All told, of the approximately 170 tax expenditures, exactly zero are systematically evaluated for their impact.
Congress is starting to focus more on evaluation of public programs. Last year, a bipartisan law — the Evidence-Based Policymaking Commission Act of 2016 — established a commission to study how data can improve government initiatives.
Last month, the commission released its final report, with smart recommendations including naming chief evaluation officers at every federal agency charged with evaluating federal programs. This proposal would go a long way toward helping understand and improve the effectiveness of government spending and, in the process, the livelihood of American citizens.
But the question is whether Congress will heed such calls. As it embarks on a major push to reform the tax code, will policymakers continue to operate with only limited tools for understanding how its actions could impact the lives of constituents?
If history is prologue, perhaps so. After it passes tax cuts, there will be no revisiting whether they are worth the cost, no post-mortem to evaluate if they did what they were designed to do.
If Congress is going to spend trillions on anything, it should actually determine whether the benefit is worth the cost.