Tax expenditures are exclusions, deductions, credits, and net preferential rates in the federal tax system that cause government revenues to be lower than they would otherwise be for any given structure of tax rates. In this report, the Congressional Budget Office examines how the benefits from major tax expenditures in the individual income tax and payroll tax systems were distributed among households in different income groups in 2019.
CBO estimates that the tax expenditures examined here totaled about $1.2 trillion in 2019, or 5.8 percent of gross domestic product, and accounted for roughly three-quarters of the total budgetary effects of all tax expenditures that year. The smallest of the tax expenditures discussed here is the state and local tax deduction ($22 billion); the largest are the exclusion and deferrals for the contributions and earnings associated with pensions and retirement savings accounts ($276 billion) and the exclusion for employment-based health insurance ($280 billion including the payroll tax expenditure).
In 2019, the distribution of benefits from the tax expenditures analyzed in this report varied considerably among income groups:
Overall, about half of the total benefits from income tax expenditures accrued to households in the highest quintile (that is, fifth) of the income distribution, whereas 9 percent of such benefits accrued to households in the lowest quintile. Payroll tax expenditures were more evenly distributed.
Households in the lowest quintile received benefits equal to 16 percent of their total income before transfers and taxes, whereas households in the highest quintile received benefits equal to 7 percent of such income.
Among the various tax expenditures, the distribution of benefits varied greatly. For example, about 95 percent of the benefits from the qualified business income deduction accrued to households in the two highest quintiles of the income distribution, whereas 82 percent of the benefits from the earned income tax credit accrued to households in the two lowest quintiles.
Provisions of the 2017 tax act (Public Law 115-97) reduced the total estimate of benefits from income tax expenditures by 9 percent. On net, those provisions made the distribution of tax expenditures more progressive because most of the benefits reduced by the tax act would have accrued to households in the highest quintile.