July 14,2011

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Julia Lawless, Antonia Ferrier, 202.224.4515

Fact Sheet: What Are the Top 10 Largest Tax Expenditures?

Tax expenditures are incentives that were intentionally included in the tax code by Congress to realize certain policy goals.  They are neither spending nor “loopholes” for millionaires, yachts or corporate jets.

Given their reach and impact on so many middle-class families, reducing them as a means of accomplishing fundamental tax reform shows the challenge ahead.  Achieving a significant tax overhaul requires a basic understanding of what tax expenditures are in order to have a fair and constructive debate to make the tax code more efficient and less burdensome. 

So, what are the top 10 largest tax expenditures?
(NOTE – these are not only the largest tax expenditures, but they also benefit individuals.)

1. Exclusion for Employer-Provided Health Insurance.
Representing 13 percent of tax expenditures, it’s the single largest tax expenditure. To do away with this would threaten access to health care for families and individuals that have health insurance through their employers.

2. Home Mortgage Interest Deduction.
Having helped millions of Americans achieve home ownership, this expenditure accounts for 9 percent of all tax expenditures.

3. Preferential Rates for Dividends & Capital Gains.
Take away this tax expenditure which accounts for 8 percent of tax expenditures, and the rate on dividends will almost triple in less than 18 months, and the rate on capital gains will go up 59%, also in less than 18 months.  This will discourage investment in stocks and bonds.

4. Exclusion of Medicare Benefits.
Accounting for 7 percent of tax expenditures, its elimination would increase taxes seniors’ Medicare benefits.

5. Pre-Tax Treatment of Defined Benefit Pension Plan Contributions.
This is a tax benefit that reduces the cost for those workers who save for retirement. It represents 6 percent of tax expenditures.

6. Earned Income Tax Credit.
Designed for low-income people, the Earned Income Tax Credit accounts for five percent of all tax expenditures.

7. Deduction for State and Local Taxes.
This deduction would hit high-tax states hardest, driving up the marginal rate of taxpayers who take this deduction by as much as 35 percent. It represents 5 percent of all tax expenditures.

8. Pre-Tax Treatment for Contributions to a 401(k). 
At four percent of tax expenditures, this is a significant incentive to families and individuals to save for retirement.

9. Exclusion of Capital Gains at Death. 
If this one goes, death would be taxed twice.  First, the decedent’s estate might get hit with the death tax.  Then the decedent’s heirs would be subject to tax again on the gain embedded in any inherited asset, should they decide to sell it.  This accounts for four percent of tax expenditures.

10. Deductions for Charitable Contributions.
This is the tax benefit for donations to charities other than education and health care institutions, including donations to religious institutions.  This charitable deduction represents four percent of tax expenditures. 

Source: Joint Committee on Taxation, “Estimates Of Federal Tax Expenditures For Fiscal Years 2010-2014,” December 21, 2010. http://www.jct.gov/publications.html?func=startdown&id=3717