Two recent reports released by the Government Accountability Office (GAO), which examine the effectiveness of tax credits that target poverty and unemployment in economically distressed areas, show that Congress must require better data collection to properly assess tax expenditure programs.

Congress does not often require extensive data collection on tax expenditures, and, as shown by the recent passage of the HIRE Act, a jobs bill composed mostly of business tax credits, business tax expenditures often receive zero scrutiny.

The first GAO report, released in January, examines the New Markets Tax Credit (NMTC), which investors receive when investing in qualified Community Development Entities (CDEs) that aid low-income communities. The CDEs help finance projects such as mixed-use facilities, housing developments, community facilities, and other business activities. The report found that the governing fund that distributes the tax credits does not collect enough data to allow the GAO to come to a definitive conclusion on whether the projects supported through these tax expenditures would have existed absent the credit. As GAO noted, "Projects with NMTC financing likely contribute employment and other outcomes to low-income communities," but "[l]imitations with available data make it difficult to isolate project impacts."

The second report, released in March, looks at the Empowerment Zone (EZ), Enterprise Community (EC), and Renewal Community (RC) programs. The programs, created by Congress through various pieces of legislation between 1993 and 2000, sought to reduce unemployment and generate economic growth in certain economically depressed rural and urban Census tracks. Through the three programs, these Census tracts received grants, tax incentives, or a combination of the two from various federal agencies, including the Department of Health and Human Services (HHS), the Department of Housing and Urban Development (HUD), and the United States Department of Agriculture (USDA). As the programs evolved, the government moved away from grants and toward tax incentives, which were used almost exclusively in later years.

Like the NMTC program, the EZ, EC, and RC programs do not provide enough data for the GAO to make a conclusive determination on whether the tax incentives are having the desired effect within these specific communities. Although the GAO found that "improvements in poverty, unemployment, and economic growth had occurred" in certain targeted Census tracts, data limitations made it difficult "to accurately tie the use of the credits to specific designated communities." Though the administering federal agencies have made improvements in data collection after earlier GAO reviews of the programs, a basic data collection goal – being able to follow the use of the tax incentives through Internal Revenue Service (IRS) records – remains unaccomplished. "It is not clear how much businesses are using other EZ, EC, and RC tax incentives,” the GAO report states, “because IRS forms do not associate these incentives with the programs or with specific designated communities."

A lack of data on the use and effectiveness of tax incentives is not unique to the programs above. In fact, as noted earlier, Congress often does not even require any study or follow-up to the tax credits it provides. And, although tax expenditures – which focus on encouraging a specific activity or rewarding a particular group of people through the tax code – are a form of spending, Congress rarely scrutinizes them like it does traditional federal budget outlays. This is despite the fact that, at $1.1 trillion, tax expenditures rival the size of the entire discretionary budget. The GAO, along with nongovernmental organizations, have long called on the government to, at the very minimum, periodically review the performance of tax expenditures to help ensure that taxpayer money is spent as efficiently as possible.

The data deficiency hides a more pervasive problem, one highlighted by the new HIRE Act. To many, it appears that Congress disproportionately scrutinizes the distribution of funds to lower-income communities and individuals. For instance, the public will never see a report on the HIRE Act similar to the two recent GAO reports, because Congress did not mandate one when it passed the act.

This disparity shows up in other tax expenditures for low-income groups. A quick glance at the IRS's audit rate of those who qualify for and accept the Earned Income Tax Credit (EITC), compared to audit rates of higher-earning taxpayers, is another example. In a report on the tax gap in 2008, OMB Watch found that "[EITC] audits constituted about 40 percent of all audits performed on individual tax returns in FY 2006, even though EITC errors account for only three percent of the tax gap."

As the OMB Watch report demonstrates, it is not as if one can attribute Congress' disparity in tax expenditure oversight to a reasonable expectation that a low-income community would defraud the government while the business community would not. Indeed, economists have been questioning the merits and expected effectiveness of the provisions of the HIRE Act for some time now. It is the lack of a systematic tax expenditure data collection system that would prevent one from assessing the effectiveness of the HIRE credits, or, for example, understand the relationship between the roughly $3.3 billion in oil and gas drilling tax credits the government handed out in FY 2009 and their impact on energy production.

Tax expenditures have become exceedingly popular among lawmakers, as Citizens for Tax Justice noted in a 2009 report, not because they are good policy – indeed, when put under a spotlight, tax expenditures fail on sound tax policy grounds – but because they are easy to enact, difficult to track, and almost impossible to end.

The GAO points out that Congress has plenty of lessons to heed when requiring data collection on tax expenditures. If Congress chose to utilize these recommendations, it would not be difficult to imagine a system that allows for the routine examination of all tax expenditures. However, Congress is not likely to reverse or stop a political tool that provides such benefits, and change on this issue will not come easily. However, the gross lack of oversight of tax expenditures, which often guarantees rank budgetary and economic inefficiencies, indicates that Congress should implement systematic examinations of the tens of thousands of tax expenditures that drain much needed revenue from the government each year.