What Counts as a Tax Preference
The federal government supports selected activities in two basic ways. It can spend money directly through appropriations and mandatory programs. Or it can reduce or eliminate taxes that would otherwise be owed. The second approach is less visible, but no less real. These provisions are known as tax expenditures.
Under the Congressional Budget and Impoundment Control Act of 1974, tax expenditures are defined as revenue losses resulting from provisions that depart from a “normal” income tax system. Put more plainly, they are deviations from the rules for measuring income and calculating tax liability. The Joint Committee on Taxation (JCT) and the Treasury Department regularly estimate how much revenue those deviations cost.
Tax expenditures generally fall into three categories. Some reduce the amount of income subject to tax through exclusions, exemptions, or deductions. Others apply lower rates to certain types of income. Still others take the form of credits, which reduce your tax liability dollar for dollar.
From a budget standpoint, the difference between direct spending and tax expenditures is mostly procedural. A grant shows up as an outlay. A tax preference shows up as reduced receipts. Either way, the deficit increases unless something else changes. The Congressional Research Service has observed that both mechanisms operate as transfers through the federal budget, even if they move through different legislative channels.
The point is to identify where the tax code treats oil and gas producers differently from similarly situated taxpayers, and to measure what those differences cost.
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