Passive Tax Expenditures: Estimates of States’ Revenue Losses Attributable to Federal Tax Expenditures

Abstract

Modern politics obligates U.S. presidents and presidential candidates to assert a commitment to reform. All nod in that direction; some create a spasm of reform fervor among the national leadership. Reform advocacy is bolstered by greater or lesser expression of outrage with the lunacy of particular loopholes in an incentive-destroying system. The polity is titillated by the display. New preferential treatments are devised by each Congress, and a very few minor ones are terminated. The tax expenditure budget grows each year, usually at a pace more rapid than the growth rate of appropriations. Eventually a new round of lamentations begins, and mostly, nothing changes. While these observations are not uncommon, and the events are barely remarkable any longer, another aspect of this situation passes almost completely unobserved, rather remarkably considering the persistent attachment of Americans in general, and officials of state governments in particular, to decentralized, federalist structures and states rights. This aspect is the loss of state revenue that occurs because state governments tie their income systems to that of the