WASHINGTON - The General Accounting Office says Congress needs to step up scrutiny of federal tax expenditures such as tax-exempt interest on municipal bonds to make sure those federal subsidies are efficient and to eliminate any that are not.
In a report released earlier this month, the GAO said Congress has looked closely for years at spending programs but failed to keep tabs on tax expenditures, even though those expenditures are expected to continue to grow at a steady pace through the rest of the decade.
Normally, federal spending is straightforward, as when Congress appropriates money for a low-income housing program. But the government may also provide incentives through tax breaks, such as the low income housing tax credit. The GAO classifies these as "tax expenditures."
The revenue loss to the federal government from the 15 largest tax expenditures, which include interest on tax-exempt public purpose bonds, is expected to grow at an average annual rate of between 2% and 4% through 1998, the report said. The revenue loss for the four years could be as high as $2.1 trillion, with tax-exempt interest accounting for $80 billion of the total.
"We believe greater scrutiny of tax expenditures is warranted," the report said. Such scrutiny "may lead to better control of associated revenues forgone if Congress finds that some tax expenditures have outlived their usefulness or could be targeted more narrowly while still accomplishing their goal of providing needed subsidies," the report said.
If Congress does take a closer look at tax expenditures, it may find that many could be cut back to done away with, the GAO said. The report used tax-exempt bonds as an example to make its point.
"Tax expenditures may not be an effective way to achieve program goals when it is difficult to target them to those entities or activities that are meant to receive the benefits," the report said.
"We have questioned, for example, the effectiveness of qualified mortgage bonds," which the agency found in a 1988 report "primarily helped buyers who could have afforded financing through a conventional mortgage." The GAO said that report led it to conclude "that this provision was costly and inefficient."
Housing advocates have, however, harshly criticized the GAO's findings on mortgage bonds, saying they were based on studies of the mortgage bond exemption as it existed before Congress passed legislation in the late 1980s to better target the subsidy.
Still, the GAO argues, overall, providing incentives through the tax code has not proven to be a superior way of providing federal subsidies. Again, the agency used an example from the bond community to make its point. "Many studies have shown that it would be less costly to pay interest subsidies directly to state and local governments than exempt state and local bonds from taxation," the report said.
One way for Congress to increase its examination of tax expenditures would be to require agencies like the Joint Tax Committee or the Congressional Budget Office to prepare periodic reports on the expenditures' level of efficiency. Congress could also establish a schedule for regularly reviewing tax items.
If Congress wanted to go further, it could overhaul, the presentation of budget information to show spending items and tax items in various categories side by side.
The report offered examples of how to integrate spending and tax information on budget documents. For example, under the category "Housing Programs," the GAO suggested listing, alongside direct expenditures, revenue losses from tax items like "exclusion of interest on state and local government bonds for rental housing." Under health programs, a typical tax line item might read, "exclusion of interest on state and local government bonds for private hospital facilities."
The report said that the Treasury Department and the Office of Management and Budget "supported expanded federal review of tax expenditures by the executive branch or Congress."
The OMB "generally agreed that our recommendations to it were reasonable and indicated that the recommendations were consistent with efforts OMB had already begun," the GAO said. For example, the budget office has already announced plans to begin reviews of related spending and tax expenditures programs, the GAO said.
But the GAO did admit that the Treasury was not convinced that including tax expenditures in the budget-reporting process would achieve the intended results.
"Treasury said that conceptual and measurement problems with tax expenditures are likely to be quite serious if tax expenditures were to be explicitly integrated into the budget process," the report said.