Tax Expenditures in the National Defense Sector
Tax expenditures are government revenue losses resulting from provisions in the tax code that allow an individual or business to reduce their tax liabilities by taking certain deductions, exemptions, exclusions, preferential rates, deferrals, or credits. Tax expenditures reduce the amount of revenue that would otherwise have been collected by the government, and thus have a similar effect on the federal budget as a spending program. They also can benefit recipients in much the same way as direct spending. Subsidyscope illuminates the budgetary costs of these programs; however, any use of these data for policy evaluation must weigh those costs against the benefits they provide. The costs of tax expenditures are estimated by two government entities: the US Department of the Treasury (Treasury), in the executive branch, and the nonpartisan staff of the Joint Committee on Taxation (JCT), a congressional committee. Each uses different methods and formats for calculating and presenting its estimates (see this Methodology page for more detail). Subsidyscope presents Treasury estimates below that are published by the Office of Management and Budget (OMB).
Table 1: Defense Related Tax Expenditures for Individuals and Corporations, Fiscal Years 2009 and 2010 ($ millions)
| Tax Expenditure | FY 2009 | FY 2010 |
|---|---|---|
| Exclusion of benefits and allowances to armed forces personnel | $11,930 | $12,740 |
| Exclusion of veterans death benefits and disability compensation* | $3,900 | $4,130 |
| Exclusion of GI bill benefits* | $300 | $450 |
| Exclusion of veterans pensions* | $190 | $210 |
| Total1 | $16,320 | $17,530 |
Source: Subsidyscope analysis of data from OMB. Budget of the U.S. Government. Fiscal year 2009 figures are from Analytical Perspectives, FY2011, pp. 209-212; fiscal year 2010 figures are from Analytical Perspectives, FY2012, pp. 241-244.
*Treasury categorized these tax expenditures in the “Veterans Benefits and Services” budget function.
Of the tax expenditures listed in Table 1, only the Exclusion of benefits and allowances to armed forces personnel falls under what the federal government classifies as the Defense sector for the budget; this is the largest defense related tax expenditure with an estimated revenue loss of $12.7 billion in fiscal year 2010. This particular tax expenditure includes the many types of payments received by members of the armed forces that are excluded from gross income, including combat zone pay, death allowances, family allowances, living allowances, moving allowances, travel allowances, and various in-kind military benefits.2
The other three tax expenditures that Subsidyscope classifies in the Defense sector are exclusions that fall under what the federal government classifies as the Veterans Benefits and Services sector for the budget.3 These include the Exclusion of veterans death benefits and disability compensation, the Exclusion of GI bill benefits, and the Exclusion of veterans’ pensions, totaling $4.8 billion in fiscal year 2010.
- Summing tax expenditures often provides a reasonably good estimate for the total cost of groups of tax expenditures, though it does not capture potential interactions among tax expenditures or behavioral responses if any single one is changed or repealed. For more on summing tax expenditures and their interaction effects, see Burman, Leonard, Eric Toder and Christopher Geissler. "How Big Are Total Individual Income Tax Expenditures, and Who Benefits from Them?" The Urban Institute. Washington, DC. December 2008. For more on why tax expenditure estimates are not exact estimates of the amount of federal revenue that would be raised if they were eliminated, see the Methodology page of Pew’s Tax Expenditure Database.
- Internal Revenue Service (IRS). "Publication 3: Armed Forces' Tax Guide." Table 2: Excluded Items. 2011.
- Exclusion of interest on veterans housing bonds is included in the Housing sector because it is a housing subsidy. The other three tax expenditures related to veterans are included in the Defense sector given that their impact on a specific sector was less defined than ‘housing bonds’ were to the Housing sector. These three exclusions include: the Exclusion of GI bill benefits (which cuts across both the Housing and Education sectors), the Exclusion of veterans death benefits and disability compensation, and the Exclusion of veterans pensions (tax expenditures for pensions will not be captured in any other sector).