February 8, 2017

The nonpartisan Joint Committee on Taxation (the tax-estimating counterpart to the Congressional Budget Office’s spending estimators) has released its annual estimate of the cost of each federal tax deduction, exclusion, credit, or other kind of tax break. Called “tax expenditures,” such tax breaks are a popular way for Congress to incentivize for one kind of behavior over another – but instead of writing a check to encourage behavior, they give a tax break. Tax expenditures have much less visibility than do many spending items, particularly the spending items in the annual appropriations bills.

When it comes to transportation, there aren’t very many tax expenditures, and they don’t add up to all that much (dollar amounts are in billions).

The exclusion for employer-provided transportation benefits is by far the largest transportation-specific tax break, at over $5 billion per year.

When you broaden the scope to include “infrastructure” in general, the dollar amounts increase significantly because one of the biggest, and longest-lived, tax expenditures is now used almost exclusively for capital spending:

The $181 billion in “Build America Bonds” issued pursuant to the ARRA stimulus law in 2009-2020 are projected to cost federal taxpayers over $3 billion per year until the expiration of the bonds. But the real federal subsidy for infrastructure is the general tax exclusion for the interest on state and local bonds, with an average of $39 billion per year in federal taxes foregone over the next five years.

The Tax Foundation did a good short history of the muni bond exclusion last summer. It is interesting to look back and realize that the original reason for excluding municipal bond interest from federal income tax was in no way policy-based. Instead, Congress was afraid that it lacked power under the U.S. Constitution to levy a federal tax on state or local revenue-raising instruments. An 1895 U.S. Supreme Court opinion indicated that a then-hypothetical federal income tax would be unconstitutional if applied to state and local bond interest, and the Supreme Court did not formally clear this up and declare a tax on muni bond interest to be constitutional until 1988.

The Tax Foundation study notes that since the constitutional issue no longer applies, “proponents of the municipal bond interest exclusion now tend to justify the continued existence of the provision in terms of its role in subsidizing infrastructure investment.”

All tax expenditures may come under review (at least under cursory review) if Republican leaders succeed in moving tax reform legislation through this Congress. Using the landmark 1986 tax reform law as a guide, the goal of tax reform is to simplify the Byzantine tax code while lowering rates, and repealing or limiting a variety of tax expenditures in order to raise the money needed to pay for the rate cuts.

In that light, it is useful to see how small all of the transportation tax expenditures are in the big picture. The table below lists the estimated value of the 20 largest tax expenditures (actually 19 of them – the muni tax exclusion, number 14 on the list, is shown on the previous page).

To say that tax reform will be challenging is an incredible understatement.