How the CARES Act Shifted the Composition of Tax Expenditures Towards Individuals

In November 2020, the Joint Committee on Taxation (JCT) released its annual report on expenditures in the tax code, showing a total of almost $1.8 trillion in 2020, up from $1.5 trillion in 2018. Much of that roughly $1.8 trillion was due to tax relief provided by the CARES Act—and reflect the policy choice to administrate pandemic relief through the tax code.

Furthermore, it’s important to note that the report was released before the second major COVID-19 relief act passed in December 2020, which featured additional stimulus checks. Nor does it include the significant child tax credit expansions and stimulus payments passed this March in the American Rescue Plan Act (ARPA), which would impact 2021 tax expenditures.

Tax expenditures can include almost any provision that changes a person’s tax liability. Of the tax expenditures in 2020, the initial $1,200 stimulus checks (technically refundable tax credits) had a cost of $269 billion, making them the largest single tax expenditure in the tax code—and they were not the only tax expenditure changed in that package.

The CARES Act also changed the balance of who benefits from tax expenditures, primarily through the stimulus payments. Just over 90 percent of tax expenditures in 2020 went to individuals, as opposed to 10 percent to corporations. That’s a 4 percentage-point increase from 2018, when individuals received 86 percent of tax expenditure benefits.

A tax expenditure is a deviation from a “normal” tax code; however, this depends on what one considers “normal” tax treatment. 

Consider Alice, who earned $50,000 last year and invested $10,000 of it in a savings account. Under the Haig-Simons definition of income, which is consumption plus change in net worth, Alice should pay income tax on the full $50,000 of salary this year, as well as on the returns to the savings in future years. However, under a definition of income that is neutral between present and future consumption, Alice would pay taxes on either the full $50,000 this year (without paying tax on the future return to her savings), or on only $40,000 this year plus the returns 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 saved but taxing returns—as examples of tax expenditures that deviate from a normal baseline. But under a savings-consumption neutral definition of income, Roths and 401(k)s are basic parts of the system and do not constitute a “special” tax break.

The JCT report relies on Haig-Simons, so it counts certain provisions as expenditures (in particular, accelerated depreciation provisions that allow companies to deduct the cost of their investments faster) that should not be thought of as preferential treatment or equivalent to a spending program. Nonetheless, the report does show some interesting trends.

While it may be inaccurate to classify specific tax expenditures as tax breaks, the report provides a useful way to see how the tax code has changed over the past few years, and in particular, the changes to tax expenditures driven by the CARES Act. The increase in expenditures associated with COVID-19 relief is another illustration of using the tax code to administer social spending.