Limited Information on the Use and Effectiveness of Tax Expenditures Could Be Mitigated through Congressional Attention
GAO-12-262: Published: Feb 29, 2012. Publicly Released: Mar 30, 2012.
What GAO Found
GAO identified 23 community development tax expenditures available in fiscal year 2010. For example, five ($1.5 billion) targeted economically distressed areas, and nine ($8.7 billion) supported specific activities such as rehabilitating structures for business use. The design of each community development tax expenditure appears to overlap with that of at least one other tax expenditure in terms of the areas or activities funded. Federal tax laws and regulations permit use of multiple tax expenditures or tax expenditures with other federal spending programs, but often with limits. For instance, employers cannot claim more than one employment tax credit for the same wages paid to an individual. Besides IRS, administering many community development tax expenditures involves other federal agencies as well as state and local governments. For example, the National Park Service oversees preservation standards for the 20 percent historic rehabilitation tax credit. Fragmented administration and program overlap can result in administrative burden, such as applications to multiple federal agencies to fund the needs of a distressed area or finance a specific.
Limited data and measures are available to assess community development tax expenditures’ performance. IRS only collects information needed to administer the tax code or otherwise required by law, and IRS data often do not identify the specific communities assisted. Other federal agencies helping administer community development tax expenditures also collect limited information on projects and associated outcomes. GAO has long recommended that the Executive Branch improve its ability to assess tax expenditures, but little progress has been made in developing an evaluation framework. Generally, neither these agencies, nor the Department of the Treasury or the Office of Management and Budget (OMB) have assessed or plan to assess community development tax expenditures individually or as part of a crosscutting review. The Government Performance and Results Act Modernization Act of 2010 (GPRAMA) calls for a more coordinated approach to focusing on results and improving performance. OMB is to select a limited number of long-term, outcome-oriented crosscutting priority goals and assess whether the relevant federal agencies and activities—including tax expenditures—are contributing to these goals. These assessments could help identify data needed to assess tax expenditures and generate evaluations of tax expenditures’ effect on community development. Through related GPRAMA consultations agencies are to have with Congress, Congress has a continuing opportunity to say whether it believes community development should be among the limited number of governmentwide goals. While community development was not on the interim priority list, Congress also can urge more evaluation and focus attention on community development performance issues through oversight activities.
In part due to data and methodological limitations, previous studies have not produced definitive results about the effectiveness of the New Markets Tax Credit, Empowerment Zone tax incentives, historic rehabilitation tax credits, and tax aid for certain disaster areas. A key methodological challenge is\ demonstrating a causal relationship between community development efforts and economic growth in a specific community. As a result, policymakers have limited information about the tax expenditures reviewed, including those that expired after 2011, and ways to increase effectiveness.
Why GAO Did This Study
Tax expenditures—exclusions, credits, deductions, deferrals, and preferential tax rates—are one tool the government uses to promote community development. Multiple tax expenditures contribute to community development. GAO (1) identified community development tax expenditures and potential overlap and interactions among them; (2) assessed the data and performance measures available and used to assess their performance; and (3) determined what previous studies have found about selected tax expenditures’ performance. GAO identified community development activities using criteria based on various federal sources and compared them with authorized uses of tax expenditures. GAO reviewed agency documents and interviewed officials from the Internal Revenue Service (IRS) and five other agencies. GAO also reviewed empirical studies for selected tax expenditures, including the New Markets Tax Credit and Empowerment Zone program which expired in 2011.
What GAO Recommends
Congress may wish to provide OMB guidance on whether community development should be among OMB’s long-term crosscutting priority goals, stress the need for evaluations, and focus attention on addressing community development tax expenditure performance issues through its oversight activities. Two agencies questioned the matters for congressional consideration or findings. GAO believes its analysis and matters remain valid as discussed in the report.
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Matters for Congressional Consideration
Status: Closed - Implemented
Comments: The Office of Management and Budget (OMB) established the first set of cross-agency priority (CAP) goals for a 2-year interim period in February 2012. The interim CAP goal for entrepreneurship and small businesses encompassed only 1 of the 23 community development tax expenditures GAO reviewed. However, as of December 2013, the New Markets tax credit was no longer identified as a potential contributor to that goal. In March 2014, OMB identified the next set of CAP goals on its Performance.gov web site; OMB will update the CAP goals every 4 years. GAO continues to monitor implementation of the GPRA Modernization Act (GPRAMA). When selecting the current set of CAP goals, OMB staff told GAO they considered factors such as the administration's priorities, GPRAMA requirements, and GAO's prior work. OMB also consulted with government-wide councils, agencies, and congressional committees when developing potential CAP goals. The current CAP goals do not identify any community development tax expenditures GAO reviewed as potential contributors.
Matter: Congress may wish to use GPRAMA's consultation process to provide guidance on whether community development should be among OMB's long-term crosscutting priority goals as well as stress the need for evaluations whether or not community development is on the crosscutting priority list.
Status: Closed - Implemented
Comments: Of the 23 community development related tax expenditures available in 2010, 11 (including the temporary disaster relief packages) have expired as of April 2016. In June 2012, the House Committee on Ways and Means held a hearing on a framework for evaluating expiring tax provisions, and GAO testified about factors to consider in extending expiring provisions. The American Taxpayer Relief Act of 2012, enacted on January 2, 2013, among other changes, extended several expiring community development tax expenditures until December 31, 2013. The Tax Increase Prevention Act of 2014, enacted on December 19, 2014, among other things, again extended those community development tax expenditures until December 31, 2014. Most recently, the Consolidated Appropriations Act of 2016, enacted on December 18, 2015, among other changes, extended the Empowerment Zone provisions as well as the Indian Employment tax credit and Qualified Zone Academy bond provisions until December 31, 2016, and the New Markets tax credit until December 31, 2019. During 2013 through 2015, the House Ways and Means and Senate Finance Committees also considered various community development tax expenditures in the context of broader tax reform discussions. Since 2012, the executive branch has produced information about the performance of two community development tax expenditures. For the 20 percent rehabilitation tax credit, the National Park Service released annual reports for fiscal years 2012-2015 describing projects using the tax credit as well as annual reports for 2011-2014 that use economic modeling to quantify some community development outputs associated with, such as estimated jobs and projected income data. For the New Markets tax credit, the Community Development Financial Institutions Fund in 2013 released a formal evaluation of the first 4 years of the program covering 2002 through 2006. In a July 2014 report, GAO recommended ensuring adequate controls against the risk of duplicative subsidies and improving data collected on project fees and costs for the New Markets tax credit program.
Matter: Congress may also wish to focus attention on addressing community development tax expenditure performance issues through its oversight activities.