A new Budget Center analysis looks at the tax breaks the state gives to businesses and to individuals and families. These tax expenditures account for a sizable amount of foregone state revenues each year, and while some achieve important goals — such as boosting the incomes of working families with low earnings — many of the largest serve questionable purposes and/or have limited effectiveness.
This new report shows that:
- Personal income and corporate income tax expenditures combined are projected to amount to roughly $48 billion in foregone revenue in 2016-17, the state fiscal year that began on July 1, 2016. This is equivalent to nearly 40 percent of the state General Fund budget for 2016-17.
- Tax breaks that primarily benefit the wealthy (such as the Mortgage Interest Deduction and Real Property Tax Deduction) or corporations (such as the Research and Development Credit) dwarf those targeted to low- and middle-income households — for example, the California Earned Income Tax Credit (CalEITC), the Renter’s Credit, and the Student Loan Interest Deduction (see chart below).
- Tax expenditures pose some key policy challenges. Unlike direct program spending, tax breaks are not typically examined or debated each year as part of the annual budget cycle. Further, repealing a particular tax expenditure in California requires a two-thirds vote in both houses of the Legislature, a much higher bar than the simple majority needed to reduce or eliminate direct program spending.
The Budget Center’s report also offers a series of recommendations for how the state could improve tax expenditures through both better oversight and better targeting.
— Steven Bliss