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Tax expenditure analysis (TEA) was rigorously criticized from its inception and continues to draw negative reviews. Notwithstanding this criticism, the Congressional Budget and Impoundment Control Act of 1974 requires the President's annual budget submission to contain a list of tax expenditures, and Congress's Joint Committee on Taxation has produced its own tax expenditure list each year since 1972. Although TEA has not restrained or reversed the growth of tax expenditures, TEA continues to play a major role in tax policy debates to the chagrin of its detractors. The persistence of TEA in a hostile environment suggests that it has meaningful substance. In Part III of this article, we argue that TEA is both a logical consequence of, and a device for implementing, the principle of ability-to-pay, the Schanz-Haig-Simons definition of income, and the tax policy principle of neutrality. In Part IV we comprehensively respond to the litany of criticisms that have been directed at TEA and argue that these objections are either wrong, deal with marginal matters or are outside the realm of practical policy concerns. We also expand on Professor Stanley Surrey's point that the tax expenditure characterization does not make an income tax provision bad per se. Instead, affixing the tax expenditure label triggers a requirement that the provision in question must be recast and examined as a direct expenditure analogue and then must go through a cost/benefit analysis. Indeed, we regard TEA's principal purpose and justification to be its role as a triggering mechanism for mandatory recasting and cost/benefit analysis. A tax provision that successfully endures this analytical approach gets a passing grade even though it bears the tax expenditure label. Of course, many, perhaps most, tax expenditures will receive failing marks when scrutinized in this fashion, but this is due to their inherent weaknesses and not because TEA amounts to a rule of automatic disqualification. One of Professor Surrey's objectives in advocating TEA was to force recognition of both the revenue cost of individual tax expenditures and the aggregate revenue cost of all tax expenditures. Critics have contended that flaws in the revenue estimation process make TEA useless for this purpose. In Part IV, we argue that these criticisms are overbroad. In Part V, we provide a brief explanation of the cost/benefit evaluative method that we believe should be applied to tax expenditures. In Part VI, we examine three important features of the U.S. international income tax system, deferral, cross-crediting, and the export sales source rule. In our judgment, all of these features involve tax expenditures that receive failing marks under the recasting and cost/benefit analysis explained in Part V.


27 Va. Tax Rev.

Publication Title

Virginia Tax Review