In the discussion and debate over federal taxes, the term tax expenditures is being used. N.C. State University economist Mike Walden explains what that means.
“It’s just a fancy sort of inside-Washington term for tax deductions. Many people know that when they do their taxes, there are certain expenditures that they make. For example, if you pay mortgage interest, interest on the mortgage for your home — you get to deduct that. That is to say, you don’t pay taxes on the income you’ve used to make that expenditure.
“And … these are …. major — they’re major deductions out there: for example, the exclusion of employee-provided health-insurance costs. That is to say, if your boss, your company, pays effectively your health-insurance premiums, effectively that is a deduction. That’s spending that you don’t have to be taxed on.
“Or … the home mortgage interest deduction, 401 K plans contributions — they are not-taxed deductions for state and local taxes.
“And people who are looking at federal taxes and looking at how federal taxes might change to address our debt problem have pointed out that these deductions — or so-called tax expenditures — have gone up over time: 5 percent of the economy 25 ago; 8 percent today.
“So, many want to limit these deductions. And so obviously, if these deductions are important to you as a family or a person, you need to keep track of how this debate unfolds.”Category: Economic Perspective