This appears to be a growing trends among states and some have taken action, such as Oregon in August 2009 adding sunset dates to many 0f their tax expenditures to ensure periodic review of them (see 8/19/09 post and June 2010 article in the AICPA Corporate Taxation Insider).
I think this happens for a few reasons including that the public seems to want more tax cuts and many politicians keep promising them (and delivering).
The problems of growing tax expenditures:
- Budget problems as evidence by almost all states having continual shortfalls.
- Lack of transparency - the tax expenditures do not show up in the budget because they are buried in the tax law.
- Inequities - special tax deductions provide a greater benefit to higher income individuals in a progressive rate structure income tax. If the benefits being provided via the tax system were instead handled as direct subsidies, they likely would not exist or at least not to the extent they do today. For example, imagine this bill going through any state legislature - To appropriate funds to the Housing Department to enable it to issue annual grants of up to $3,500 to homeowners, with those having mortgages of $1 million receiving the maximum grant of $3,500 and those with smaller mortgages receiving less. That is unlikely to occur, yet that is what exists in the income tax laws of all states with an income tax.
- Complications - the more special rules - exemptions, exclusions, special deductions and credits in the tax law, the more complicated it is.
It will be interesting to see what Maine and other states do with information such as that recently provided to the Maine legislature. As states continue to look for spending cuts, they will need to delve into the spending in the tax system as it represents significant dollar amounts. Doing so should also enable the law to better meet the principles of equity, transparency, simplicity and appropriate government revenues.
What do you think?