Spending by not taxing

A recent bill to eliminate tax preferences or tax breaks for some types of businesses while lowering the corporate tax rate on all corporations has produced plenty of debate around when is it good policy (or good for Minnesota) to promote public policy goals through the tax system. There’s a very useful resource on this subject – the State of Minnesota Tax Expenditure Budget. The Minnesota Department of Revenue published the 2008 edition just last month. Conducted every two years, the report details tax exemptions, deductions, credits and lower tax rates given to certain groups, people or businesses or particular activities. It’s a 180+ page report, including descriptions and the cost of state and local tax expenditures. It’s a great read.

To quote the Department of Revenue, “These provisions are called ‘expenditures’ because they are similar to direct spending programs.” They just show up on the other side of the balance sheet, in the form of reduced tax revenue.

So tax expenditures are just another way of making public policy – promoting a particular activity or supporting a particular group. The theory behind  these expenditures is that government can encourage homeownership through the mortgage interest deduction, or help college students through the exempting of scholarships and grants from the income tax. And just like any other issue, there are pros and cons to each tax expenditure. At least the Tax Expenditure Budget provides us with a baseline of knowledge so we know the cost of these policies.

-Katherine Blauvelt

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