The US tax code is riddled with preferences, like tax credits for green energy and healthcare, that significantly drain government revenue. Reining in these “tax expenditures” could generate trillions of dollars, creating an opportunity for fundamental tax reform that simplifies the system and fuels economic growth.
With Republicans seeking ways to finance extensions of expiring Tax Cuts and Jobs Act (TCJA) provisions and potentially enact further tax cuts, identifying revenue sources is crucial. Reducing tax credits and other preferences offers a promising avenue, potentially unlocking trillions. Many of these preferences function as spending programs embedded within the tax code, escaping rigorous budgetary oversight while simultaneously complicating tax filing and increasing compliance costs for taxpayers.
The Treasury Department has identified 170 distinct tax expenditures projected to reduce federal tax revenue by over $28 trillion over the next decade, encompassing income tax, payroll tax, and outlay effects. The Joint Committee on Taxation offers a similar analysis, estimating tax expenditures will decrease income tax revenue by approximately $11 trillion between 2024 and 2028.
However, simply eliminating all tax expenditures isn’t a practical or even desirable solution. Tax expenditure estimates differ from revenue estimates, as they don’t fully account for behavioral or economic changes, interactions between different tax provisions, or timing effects within the 10-year budget window. Furthermore, some tax expenditures serve important economic functions, mitigating the negative impacts of the income tax by encouraging saving and investment. For example, 401(k)s promote neutral treatment of saving versus consumption, while expensing provisions allow businesses to fully deduct investment costs.
Even after excluding broad-based saving and investment provisions, the Treasury estimates over $18 trillion in tax expenditures remain from 2025 to 2034. Of this, around $3.6 trillion comes from refundable tax credits, with about $2.3 trillion of that classified as federal outlays. Arguably, the entire $3.6 trillion represents government spending channeled through the tax code, as it isn’t contingent on tax liability.
Green energy credits, expanded by the Inflation Reduction Act (IRA) of 2022, constitute the largest category of refundable tax credits. The Treasury projects 16 different green energy credits will add roughly $1.2 trillion to deficits from 2025 to 2034, with approximately $1.1 trillion attributed to refundable credits. These include credits for energy production ($304 billion), clean vehicles ($206 billion), and advanced manufacturing production ($190 billion). Many of these credits are accessible to taxpayers with no tax liability and even tax-exempt entities through transferability and direct pay. Reining in or capping these credits could significantly reduce deficits. The Treasury estimates the refundable portion of these credits alone will add about $341 billion to deficits over the next decade.
Beyond green energy, the Affordable Care Act’s health insurance premium assistance tax credit is the largest refundable credit, estimated to cost $1 trillion over the next decade, with $897 billion classified as outlays. The American Rescue Plan Act of 2021 and the IRA temporarily expanded this credit through 2025.
Other significant refundable credits include the earned income tax credit (EITC) and the child tax credit (CTC). The TCJA’s expanded CTC is set to expire at the end of the year. The Treasury estimates the EITC will cost $822 billion over the next decade ($771 billion in outlays), and the CTC $499 billion ($291 billion in outlays). If the TCJA’s CTC expansion isn’t extended, its annual cost will drop significantly.
Numerous other tax expenditures warrant scrutiny. The largest is the exclusion of employer-provided health insurance premiums and medical care, estimated to add $5.9 trillion to deficits over the next decade. This represents a substantial and distortionary loophole that has grown over time as employers favor this untaxed benefit over taxable cash compensation.
Other major individual tax expenditures include the state and local tax (SALT) deduction ($1.5 trillion) and the mortgage interest deduction (MID) ($904 billion). These figures are based on current law, which assumes the TCJA’s $10,000 SALT cap and tighter MID limits expire at the end of the year.
The business tax code also contains questionable preferences beyond green energy credits, offering special treatment to specific businesses and industries. These include the low-income housing investment credit ($167 billion), the exemption of credit union income ($32 billion), the new markets tax credit ($8 billion), and special tax benefits for Blue Cross/Blue Shield ($6 billion).
Lawmakers have ample options within the existing list of tax expenditures to generate trillions to offset tax cuts. Furthermore, addressing these expenditures, many of which represent spending through the tax code or non-neutral treatment of taxpayers, is a critical component of meaningful tax reform. Curtailing these expenditures could pave the way for a more comprehensive and lasting tax overhaul that not only simplifies the tax system but also fosters long-term economic growth.
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