Federal Tax Spending: CARES Act

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Federal tax expenditures CARES Act federal tax expenditures for fiscal

In November 2020, the Joint Committee on Taxation (JCT) released its annual report on spending in tax legislation, which stood at nearly $ 1.8 trillion in 2020, up from $ 1.5 trillion a year 2018. Much of this roughly $ 1.8 trillion was taxable relief under the CARES Act – and reflects the political decision to administer the pandemic relief through the tax code.

Additionally, it should be noted that the report was released prior to the passing of the second major COVID-19 relief bill in December 2020, which included additional stimulus testing. It also does not include the significant child tax credit extensions and stimulus payments passed in March under the American Rescue Plan Act (ARPA) that would affect tax spending in 2021.

Tax expenses can include almost any provision that changes an individual’s tax liability. Of the 2020 tax expense, the $ 1,200 initial economic reviews (technically recoverable tax credits) cost $ 269 billion, making them the largest single tax expense in tax law – and they weren’t the only tax expense that have been changed in this package.

Table 1: Individual and corporate tax expenditures by year

2018 2020
Corporate tax expenses $ 200 billion $ 172 billion
Individual tax expenses $ 1.3 trillion $ 1.62 trillion
total $ 1.5 trillion $ 1.795 trillion

Sources: Joint Tax Committee, “Estimates of Federal Tax Expenditures for the 2018-2022 Financial Years”; Joint Tax Committee, “Estimates of Federal Tax Spending for Fiscal Years 2020-2024”; Robert Bellafiore, “Pre- and Post-Tax Tax Spending and Jobs Act,” Tax Foundation, December 18, 2018; and calculations by the author.

The CARES Act also changed the balance of those who benefit from tax spending, mainly through stimulus payments. A little more than 90 percent of tax spending in 2020 went to private individuals, compared with 10 percent to companies. This is an increase of 4 percentage points from 2018, when individuals received 86 percent of tax breaks.

A tax expense is a deviation from a “normal” tax code. However, this depends on what is considered to be “normal” tax treatment.

Think of Alice, who made $ 50,000 last year and invested $ 10,000 in a savings account. According to the Haig-Simons definition of income that is consumption plus change in net worth, Alice should pay income tax on the full $ 50,000 of salary for that year and on income from savings in years to come. However, under a definition of income that is neutral between present and future consumption, Alice would tax either the full $ 50,000 this year (excluding tax on the future return on her savings) or just $ 40,000 this year plus the returns in numbers in future years.

Using Haig-Simons, one would consider Roth IRAs – taxing income when it is saved but exempting returns – or traditional 401 (k) s – exempting income when it is saved but taxing returns – as examples of tax expenditures that deviate from a normal baseline. According to a thrift-neutral definition of income, Roths and 401 (k) s are fundamental components of the system and do not represent a “special” tax break.

The JCT report relies on Haig-Simons, so certain provisions are counted as expenses (especially provisions for accelerated depreciation that allow companies to more quickly deduct the cost of their investments) that should not be viewed as preferential treatment or equivalent to an expense program. Still, the report shows some interesting trends.

Table 2: Largest individual and corporate tax expenditures, 2020

Individual tax expenses Corporate tax expenses
2020 Prepaid and Refundable Eligible Individual Tax Credit ($ 269 billion) Reduced Active Income Tax Rate of Controlled Foreign Companies ($ 45.4 billion)
Exclusion of employer contributions to healthcare, health insurance premiums and long-term care insurance premiums ($ 169.6 billion) Equipment depreciation beyond the alternate depreciation system ($ 43.2 billion)
Net Exclusion from Pension Contributions and Income: Defined Benefit Plans ($ 153.6 billion) Credit for increasing research activities ($ 13.2 billion)

Sources: Joint Tax Committee, “Estimates of Federal Tax Spending for Fiscal Years 2020-2024” and author’s calculations.

While it may be inaccurate to classify certain tax expenses as tax breaks, the report provides a useful way to see how tax laws have changed in recent years, and in particular the changes in tax expenses due to the CARES Act. The surge in spending related to COVID-19 relief is another example of using the tax code to manage social spending.

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