Tax Expenditures 1 D SCOTT SHOWALTER CPA CGFM

Tax Expenditures 1 D. SCOTT SHOWALTER, CPA, CGFM CHAIRMAN, US FEDERAL ACCOUNTING STANDARDS ADVISORY BOARD 16 TH ANNUAL OECD PUBLIC SECTOR ACCRUALS SYMPOSIUM

Disclaimer 2 �Views expressed are those of the speaker.

Overview 3 �What are tax expenditures? �Why do they matter? �Challenges and options for reporting?

What Are Tax Expenditures? 4 Revenue losses attributable to provisions of the U. S. Federal tax laws which allow: • special exclusion, exemption, or deduction from gross income • provide a special credit, a preferential rate of tax, or a deferral of tax liability Source: Congressional Budget and Impoundment Act of 1974

Examples 5 Not taxed: Employer-provided health insurance Gains from the sale of a home Earnings set aside for retirement Interest on state and local bonds

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Tax Policy 7 Tax Policy Social Policy

Use Increasing 8

Largest Tax Expenditures - Fiscal Year 2016 Billions of Dollars 210 980 92 820 67 780 Exclusion health insurance Reduced capital gains tax rates 66 600 64 710 62 440 58 270 51 380 44 240 Deferral of Defined benefit Defined Deductibility of Step-up basis Deductibility of income from employer plans contribution mortgage of capital gains State and local charitable controlled pension plans interest at death taxes contributions foreign corp 9

Why It Matters 10 �Transparency �Tax Policy �Story of government services

Why It Matters 11 � Transparency – An important component of a comprehensive overview of financial position and performance. � Tax Policy – Tax code is not subject to annual review in the same fashion as the budget. Tax reform requires an evaluation of tax expenditures which adds complexity to the challenge. � Tell the story of government services – They are a tool of government but their success may not be measured and assessed as frequently as other programs. Also, their role may be harder to understand. See http: //www. gao. gov/key_issues/tax_expenditures/issue_summary

Is the tax expenditure good policy? See http: //www. gao. gov/key_issues/tax_expenditures/issue_summary 12

Does it Help Meet Reporting Objectives? 13 �Operating Performance – cost of government actions and how costs are financed should be known. Tax expenditures are a growing part of the story of service efforts and accomplishments. �Stewardship – how the government makes investments that impact the nation’s financial condition is important information. Tax expenditures are an investment tool that may be overlooked by citizens.

Challenges 14 �Definition (what’s “normal” affects what’s in and what’s out) �Measurement �Accuracy

Reporting Options 15 �Amounts in financial statements �Note disclosures �Management’s discussion and analysis �Required supplementary information �Other information

What Is FASAB Proposing? 16 �Management’s discussion and analysis �Note disclosure �Other information �Monitor progress

Questions 17

Contact Information 18 D. Scott Showalter, CPA, CGFM Chairman, FASAB 919. 513. 0526 scott_showalter@ncsu. edu www. fasab. gov