STATE AND LOCAL FINANCE
What About Tax Expenditures?
Tax expenditures were instigated as a special tax treatment to achieve particular social purposes. They may serve worthy goals and in California currently include the deduction for mortgage interest expense, sales tax exemption for food, bank and corporation tax exemptions for employer contributions to health plans, and rate reductions for small corporations.
A tax expenditure is defined as a revenue loss which occurs because of deductions, credits, exclusions and preferential rates in a tax code. Tax expenditures shrink the tax base, and several other aspects of tax expenditures are also problematic to the budget process.
Tax expenditures are enacted with a simple majority vote of the legislature. To repeal a tax expenditure, however, requires a two-thirds majority vote, in that repeal is considered a tax increase. Rarely is a tax expenditure put in place with a sunset clause; with little review no one really knows if the expenditure's desired effects are being reached.
Money not collected is not a part of the budget, so once in place, tax expenditures no longer appear as part of any budget document -- they are "off budget." Yet, they account for more than $20 billion in taxes not collected.
The November 2004 ballot may have an initiative measure known as the Corporate Tax Accountability Act that will address some of the more egregious components of California's tax expenditure practices.
--LWVC
