Introduction: A Principled Approach to Tax Expenditures

While a handful of tax provisions correct for distortions introduced in the tax code—for example, the double taxation of investment and savings—most tax expenditures distort markets, raise prices, favor special groups, or violate the principle of tax neutrality. 

Eliminating tax expenditures should be combined with lowering marginal tax rates across the board to avoid increasing the tax burden on the economy as a whole. Simplifying the tax code while simultaneously broadening the tax base and lowering rates would be both progrowth and fiscally prudent. Recognizing the limits of what can be achieved in meeting these goals, we recommend both reform ideas for improving many of these tax provisions and options for repealing those that are distortionary. 

Exclusion of employer contributions for medical insurance premiums

When Congress created the income tax in 1913, few employers provided health benefits, so little thought was given to whether or not those benefits should be counted as taxable income. As the Cato Institute’s Director of Health Policy Studies, Michael Cannon has noted: “The tax exclusion was an accident of history.” 

The employer sponsored insurance (ESI) exclusion is the largest tax expenditure, costing $3,909 billion over the 10-year budget window. The provision incentives overconsumption of health insurance and ties coverage to employment. Repeal this provision and replace it with a less distortionary alternative: raising the HSA contribution limit to a level that allows most workers to contribute their employer’s entire premium payment tax-free. This can be done up to a level that is revenue neutral when repealing the ESI exclusion. Alternatively, cap the ESI exclusion at the 50th percentile of premiums, reducing distortions that favor employer-sponsored insurance over other forms of coverage. We estimate that capping the ESI exclusion at the 50th percentile would raise $661 billion over 10 years.

Deductibility of nonbusiness state and local taxes

The state and local tax deduction, otherwise known as SALT, allows taxpayers to deduct state and local income taxes (or, alternatively, sales taxes) and property taxes from their federal income tax liabilities. Following the enactment of the 2017 Tax Cuts and Jobs Act (TCJA), the SALT deduction for taxes paid in any taxable year from 2018 to 2025 has been limited to $10,000 per household ($5,000 for married individuals filing separately). 

The benefits of the SALT deduction are limited to earners at the very top of the income scale, specifically, most of the 9% of taxpayers who itemize their deductions. In 2021, fewer than 11 million tax returns (out of 161 million)—just 7%—included the state and local income tax deduction. According to 2021 IRS statistics of income data (table 2.1), 99% of the value of tax benefits from the SALT deduction go to earners making more than $100,000 a year, while 68% go to an even smaller group of fewer than 1.5 million earners making more than $500,000 a year. 

The SALT deduction also distorts the financing decisions made by state and local lawmakers. The deduction influences the types of taxes that state and local governments implement, biasing them toward choosing taxes that are deductible rather than most efficient. It is no surprise, then, that prior research on the SALT deduction has found that it leads to state and local tax increases of about 13%–14%.

The most fiscally prudent action would be the full repeal of the SALT deduction, which would raise $2,008 billion over 10 years. Extending the $10,000 SALT cap created under TCJA beyond its planned expiration in 2025 would raise $1,159 billion against the baseline. Since the passage of TCJA in 2017, state governments have allowed pass-through businesses to work around the SALT cap, allowing them to benefit from more than $10,000 in deductions against their federal tax liability. To date, 35 states allow these workarounds. Repealing these workarounds would raise $200 billion over 10 years. 

Deductibility of charitable contributions

Four years after the creation of the income tax, the Revenue Act of 1917 introduced the individual income tax deduction for charitable donations. The deduction is intended to foster a charitable sector with a degree of autonomy and independence from government control. The TCJA temporarily increased the charitable deduction from 50% to 60% of adjusted gross income (AGI). 

The charitable sector helps reduce government intervention in civil society by encouraging private philanthropy over state-funded welfare. Limiting or repealing the charitable deduction should be paired with broader reforms that lower tax rates across the board, reducing distortions in the tax system. 

Repealing the charitable deduction would raise $1,048 billion over 10 years. Alternatively, limiting deductibility of charitable contributions in excess of 2% of AGI would raise $338 billion, while limiting deductibility to cash contributions would raise $324 billion. 

Deductibility of mortgage interest on owner-occupied homes

This provision allows owner-occupants to deduct mortgage interest paid on their primary residence and one secondary residence as an itemized, non-business deduction. The deduction is limited to interest on debt of no more than $1 million; however, this limit was lowered to $750,000 when TCJA was passed in 2017. 

As the Cato Institute’s Adam Michel notes: “The mortgage interest deduction is not associated with additional homeownership…Instead, it subsidizes larger houses for older, higher-income taxpayers.” The deduction encourages the purchase of high-priced homes, distorting the housing market by prioritizing larger single-family residences over multifamily rental units that are essential for working-class and lower-middle-class families. This inefficiency in land use worsens an already critical issue—the steep cost of housing for lower-income households in many metropolitan areas, where zoning laws have already inflated prices to unsustainable levels. The benefits of the mortgage interest deduction flow overwhelmingly to the wealthy, with some 73% going to the top 20% of the income distribution.

Repealing the mortgage interest deduction would be the most fiscally prudent action, raising $904 billion over 10 years. If reform is more politically palatable, then reducing the deduction cap to $500,000 would raise $260 billion against the baseline, while extending the current cap would save $130 billion versus allowing it to expire. 

Earned income tax credit

The Earned Income Tax Credit (EITC) was introduced in the 1975 Tax Reduction Act as a temporary program aimed at incentivizing work. The EITC is a refundable tax credit for low- to moderate-income individuals and couples that directly reduces the amount of tax they owe on a dollar-for-dollar basis. It is meant to encourage lower-income Americans to join the labor force.

Both data and empirical evidence suggest that the program is not very effective at reducing poverty. The credit also indirectly harms those low-income workers who are ineligible for the subsidy, particularly low-income childless workers, and reduces labor force participation among second earners in married households. Like so many social welfare programs administered by the IRS, EITC has a serious error and fraud problem, with about a third of benefit payments being made in error every year. 

Full repeal of the EITC would be the most fiscally responsible action, raising $822 billion over 10 years. Unfortunately, reform options are nearly impossible to deliver when welfare benefits are distributed through the tax code. 

Capital gains exclusion on home sales

This exclusion allows homeowners to exclude from gross income up to $250,000 ($500,000 in the case of a married couple filing a joint return) of capital gains from the sale of a principal residence. However, the exclusion creates a preference for housing wealth over other types of investment income, violating the principle of tax neutrality. By making housing capital gains tax-free (up to a point), the policy encourages overinvestment in housing rather than other productive assets, distorting capital allocation and exacerbating affordability problems. 

Eliminating this tax expenditure would raise $802 billion over 10 years. However, under a simplified cash flow or flat tax system, capital gains on any savings or investments (including a primary residence) would not be taxed. In this case, an exemption would not be necessary, as these gains would not be subject to taxation to begin with. 

Exclusion of municipal bond interest

The interest on municipal, or muni bonds—debt issued by states, cities, and other government entities to fund their daily operations and finance capital projects—has been exempt from federal income tax since the federal tax system was established in 1913. In 2010, the Simpson–Bowles Commission on Fiscal Responsibility and Reform called for eliminating the tax exemption on all interest from new municipal bonds.

State and local governments should not be in the business of picking winners and losers through the tax code, as doing so can lead to fiscal profligacy and misaligned economic incentives. One analysis conducted by the Cato Institute noted how tax-exempt municipal bonds have prevented the privatization of air transportation in the US, even though many other countries have embraced privatization. Half of Europe’s airports are privately owned, with three in four air passenger trips occurring through privatized airports. Meanwhile, in the United States, all major airports are government owned and operated.

Like so many tax expenditures, the municipal interest exclusion is deeply regressive. Almost half of the beneficiaries of tax-free municipal interest are households in the top 0.5% of the wealth distribution. 

Full repeal of this exclusion would be the most fiscally prudent action, saving $613 billion over 10 years. Alternatively, eliminating private activity bonds (muni bonds that support private business activities) would raise $144 billion while eliminating the exemption for newly issued bonds would raise $43 billion. 

A 20% deduction to certain pass-through income (199A)

More than 90% of US businesses pass their income through from the entity level to the owners, where it is taxed at individual income tax rates. TCJA introduced IRC Section 199A, which allows a 20% deduction on qualified business income (QBI) for pass-through entities (S corporations, partnerships, and sole proprietors). 

To simplify the tax code and move towards a system of tax neutrality, policymakers should consolidate the corporate and pass-through tax systems so that all business income falls under a single system, whether the current 21% corporate rate or a more competitive 15% rate. 

Eliminating 199A would raise $780 billion over 10 years. Phasing out the deduction for income above $200,000 ($400,000 for married couples filing jointly) would save $470 billion. An alternative proposal by economist Doug Holtz-Eakin recommends taxing 23.7% of pass-through earnings at the 20% capital gains rate. This option would raise $350 billion over the 10-year budget window.

Step-up basis of capital gains at death

This provision exempts capital gains on assets transferred to heirs. The cost basis of appreciated assets is adjusted to the market value at the owner’s date of death, which becomes the basis for the heirs. 

Taxing capital gains differently before and after death constitutes unequal tax treatment of capital gains. This tax expenditure costs $570 billion over 10 years. Replacing the stepped-up basis rules with carryover basis would ensure equal treatment of capital gains realized before death. This would also save $130 billion over a decade. Again, as with a simplified cash flow or flat tax system, capital gains on any savings or investments would not be taxed. 

Child Tax Credit

The Child Tax Credit (CTC) was first introduced in 1997 as part of the Taxpayer Relief Act, offering families below a certain income threshold a tax credit of $400 per dependent child. Over the years, the credit has expanded several times, most notably in 2017 and 2021. Since the passage of TCJA, a maximum credit of up to $2,000 per dependent can be claimed, with gradual phasing out starting at an AGI above $400,000 for married couples filing jointly. 

The credit functions as a subsidy for middle- and upper-income families, with only 19% of CTC expenditures going to the lowest quintile of income earners. In his 2024 book on tax policy, economist Scott Hodge points out that for taxpayers earning between $25,000 and $30,000, the average credit in 2019 was $711, while for taxpayers earning between $200,000 and $500,000, the average credit was $3,018. Beyond this, the CTC is poorly targeted, creates perverse incentives, discourages workforce participation, and is unlikely to achieve the policy goals of reducing poverty and increasing fertility rates. 

The IRS should not be in the business of disbursing social transfers through the tax code. The CTC should be fully repealed, saving the Treasury $500 billion over 10 years. Reform options with more modest savings include phasing out credits for tax filers with income above $150,000 (instead of $400,000), which would raise $180 billion. Another option would be to require credit recipients (including EITC recipients) to have a valid Social Security Number (SSN) that is valid for employment, which would raise $28 billion. 

Credit for increasing research activities

This provision provides a credit for research and experimentation (R&E) of up to 20% of qualified research expenditures. In 2024, about $30 billion in R&E credits were disbursed by the IRS. The revenue service should not be in the business of picking winners and losers through tax subsidies, especially when the private sector already provides over $812 billion in R&D funding support. Credit disbursements also allow the government to pick politically favorable businesses and industries, as well as create an abundance of opportunities for rent-seeking. A 2015 Mercatus Center study found that the R&D tax credit’s unseen costs undermine its predicted benefits and recommended that the credit be eliminated and the resulting savings used to lower the tax rate for all corporations.

Eliminating this credit would raise $409 billion over 10 years. The best policy action would be to repeal the credit and replace it with full expensing and other business provisions to encourage R&D investment. 

Reduced tax rate on active income of US controlled foreign corporations

Prior to the passage of the TCJA, the active income of any foreign corporation controlled by a US corporation was generally taxed on active foreign income only when the income was brought back, or “repatriated,” to the US. The TCJA changed these rules so that certain active income—specifically, global intangible low-taxed income, or GILTI—is taxed currently, even if it is not brought back to the US. However, US corporations generally receive a 50% US tax deduction on their GILTI (the deduction decreases to 37.5% in 2026), resulting in a substantially reduced tax rate.

This tax expenditure should be repealed because it undermines the territorial tax system established by the 2017 TCJA, causing a large share of foreign profits to be taxed by the US immediately and putting American firms at a competitive disadvantage. These complex and costly rules are only necessary when the corporate tax rate is too high and profit shifting needs to be incentivized. A truly competitive tax code—featuring a lower corporate rate and full expensing—would eliminate the need for burdensome anti-base-erosion measures like GILTI, making the US a more attractive investment destination.

Full repeal of this provision would save $384 billion over 10 years. Alternatively, limiting GILTI benefits to foreign-derived income would save $69 billion. Another option would be to significantly narrow the definition of controlled foreign corporation (following examples of Ireland and Estonia), including repealing the GILTI minimum tax rules. 

Energy production credit

The Energy Policy Act of 1992 created the energy production tax credit (PTC)—a tax credit for corporations that produce or invest in renewable energy sources. The Inflation Reduction Act (IRA) of 2022 massively expanded and extended energy production and investment tax credits, and the costs of these new credits have yet to appear in the Treasury’s data. One estimate suggests that the long-term costs of the PTC alone could reach $3 trillion by 2050. 

Government energy subsidies like the PTC often result in certain companies or industries gaining an unfair advantage. By far, the largest benefits of the PTC are concentrated among a small number of energy corporations that construct wind turbines. One analysis found that three-fourths of the PTC’s allocated resources are concentrated in just 15 energy companies, 7 of which are foreign corporations. Most of these same corporations are represented by the American Clean Power Association, a trade association that lobbies for corporate welfare in the energy production sector. Prior analysis has also found that many of these 15 companies receiving the PTC received enough transfers, in the form of the PTC and other subsidies, to fully offset their total income tax obligations. 

Ultimately, the government cannot accurately determine which market players are the most productive and innovative. By showering subsidies on a select few large corporations, the government is shifting capital away from other firms that may have greater productive and innovative potential but are excluded from government-granted privilege. Full repeal of the PTC would be the most fiscally responsible action, raising $304 billion over 10 years. Repealing the expanded subsidies under the IRA could save up to $183 billion. 

Deductibility of medical expenses

Personal expenditures for medical and dental care (including the costs of prescription drugs) exceeding 7.5% of the taxpayer’s adjusted gross income are deductible. Like most itemized deductions, the medical expense deduction is poorly targeted to meet its goals and mostly benefits wealthier taxpayers. Eliminating this deduction would raise $254 billion over 10 years. Raising HSA contribution limits would also help to alleviate the cost burden of medical expenses for most Americans, in a way that is more accessible than itemized deductions. 

Tax credit for clean vehicles

The Clean Vehicle Credit (Section 30D of the IRA), aiming to accelerate EV adoption and reduce carbon emissions, provides a $7,500 tax credit for buyers of qualifying new electric vehicles (EVs). However, the EV market, driven by technological advancements, private investment, and consumer demand, is already expanding, without government intervention. The CVC distorts the market by artificially lowering EV prices, incentivising manufacturers to raise base prices and capture much of the subsidy’s value rather than to pass savings on to consumers. 

Additionally, the credit disproportionately benefits higher-income households, as EVs remain significantly more expensive than gasoline-powered alternatives. The subsidy thus becomes a wealth transfer to affluent buyers at the expense of all taxpayers. The environmental impact is overstated, as many EVs still rely on electricity generated from fossil fuels, and the production of EV batteries requires significant mining of rare earth materials, often with high environmental and ethical costs. If EVs are truly the future of transportation, they should succeed on their own merits without continued government handouts. 

Meanwhile, free-market solutions, such as reducing regulatory barriers to EV production, improving charging infrastructure through private investment, and allowing battery technology to advance naturally, would be more effective at reducing emissions and making EVs more affordable in the long run. With billions already spent on EV incentives, these funds would be better allocated toward broad-based tax relief or infrastructure improvements rather than subsidizing an industry that is already moving toward widespread adoption. Full repeal of this credit could raise up to $393 billion over 10 years. 

Exclusion of veteran death benefits and disability compensation

All death or disability compensation paid by the Veterans Administration is excluded from taxable income under current law. However, under a neutral tax system, all compensations, including dedicated payments and in-kind benefits, should be included in taxable income because they represent accretions to wealth that do not materially differ from cash wages. 

While this might be a politically sensitive provision, if the US is to adhere to the principles of equal tax treatment, this carve-out should not exist. Eliminating this tax exclusion would raise $204 billion over 10 years. 

Corporate SALT deduction

Under current law, C corporations subject to the federal corporate income tax may deduct all state and local income, property, and/or sales taxes from their federal taxable income. While TCJA capped SALT deductions at $10,000 for single and joint filers who itemize their income tax deductions, this cap applies only to individuals—not C corporations, which continue to have no cap on SALT deductions. 

While full elimination of the corporate SALT deduction would be the most fiscally prudent action, there are several options for reform. Applying the $10,000 SALT cap to corporate income and property taxes would raise $793 billion over 10 years. Alternatively, capping only corporate state and local income taxes while allowing full property tax deductions would raise a more modest $290 billion, and eliminating income tax deductibility for SALT while continuing to allow corporate deductions for wage, sales, and property taxes would raise $192 billion. 

Exclusion of benefits and allowances to armed forces personnel

Certain housing and meals, in addition to other benefits provided to military personnel—whether in cash or in kind—as well as certain amounts of pay related to combat service, are excluded from taxable income. The same principle that applies to veterans' death and disability benefits applies here: All compensations, including dedicated payments and in-kind benefits, should be included in taxable income because they represent accretions to wealth that do not materially differ from cash wages. Eliminating this exclusion would save $194 billion over 10 years. 

Advanced manufacturing production credit

This is a per-unit tax credit for the domestic production of key clean energy components, such as solar panels, wind turbines, battery cells, and critical minerals used in energy storage and electric vehicles (EVs). The goal of the credit is to boost US manufacturing of clean energy products by reducing production costs and incentivizing domestic supply chains. It was created under the Inflation Reduction Act (IRA) of 2022 and set to last through 2032. The credit artificially lowers production costs for politically favored industries (solar, wind, EVs) while ignoring other energy sectors and forces taxpayers to subsidize industries that may not be cost-competitive without government support. 

Companies receiving subsidies are less motivated to lower costs and improve efficiency since they rely on government assistance. If these industries are truly viable, they should be able to compete without subsidies. Eliminating this credit would save $190 billion through 2032. 

Exclusion of the interest spread of financial institutions

Instead of paying consumers the full market interest rate on demand deposits, financial institutions pay them a lower rate and cover fees for services such as debit cards, check cashing, and others. The difference between the market interest rate and the lower rate is called the interest spread. Consumers are not taxed on the interest spread--government forgoes this tax revenue. 

Rather than carving out special tax breaks for banks, the government should pursue lower and simpler tax rates across the board. Eliminating this tax provision would raise $188 billion over 10 years. 

Credit for low-income housing investments

The Low-Income Housing Tax Credit (LIHTC) is a federal program established in 1986 under the Tax Reform Act aimed at incentivizing the development and rehabilitation of affordable housing for low-income households. It provides developers with tax credits that can be sold to investors to raise capital for housing projects. 

However, empirical research and data show that the LIHTC does not actually provide a greater amount of affordable housing than the market would otherwise provide. Instead, the program raises housing costs and crowds out market-based housing development. As policymakers begin to discuss tax policy and consider reauthorizing provisions of the Tax Cuts and Jobs Act, it is crucial to reevaluate the LIHTC. Eliminating this tax expenditure would save $168 billion over the next decade and allow lawmakers to focus on more effective and less market-distorting solutions for addressing the affordable housing crisis.

Self-employed medical insurance premiums

Under current law self-employed taxpayers may deduct their family health insurance premiums from their federal income tax liability. Under the principle of tax neutrality, all compensation and remuneration, including dedicated payments and in-kind benefits, should be included in taxable income. 

Any changes should mirror those made to employer contributions for medical insurance premiums. Repealing this deduction would raise $144 billion over 10 years. 

Energy investment credit

This tax expenditure provides an investment tax credit (ITC) for zero-emission power plants and battery storage. It duplicates Section 45Y, adding unnecessary redundancy. Clean energy investments should be market-driven, not subsidized by taxpayers. 

While full elimination of the ITC would be the most fiscally prudent action, there are other avenues for reform. For example, repealing the expanded ITC subsidies under IRA would raise $263 billion over 10 years. 

Deduction for foreign-derived intangible income derived from trade or business within the United States

After the passage of the TCJA, domestic corporations have been allowed a deduction equal to 37.5% of “foreign-derived intangible income,” which is essentially income from serving foreign markets. The allowed deduction falls to 21.875% in 2026. 

With a low enough corporate tax rate and full expensing, this cross-border tax rule should be repealed. Along with the GILTI and the Base Erosion and Anti‐​Abuse Tax (BEAT), this provision should be fully eliminated, raising revenues by $130 billion over 10 years.

Tax credits for post-secondary education expenses

In the late 1990s, the Clinton administration created two new tax credits to subsidize the cost of higher education expenses: the Hope Scholarship and the Lifetime Learning Credit (LLC). The former was replaced by the American Opportunity Tax Credit (AOTC) as a temporary measure in the 2009 American Recovery and Reinvestment Act and was subsequently made permanent in 2015. 

Both of these credits are intended to help students defray the costs of their education. The AOTC allows college students to claim $2,500 per year on qualifying expenses including tuition fees, books, supplies or equipment needed for a course of study. Similarly, the LLC allows students to claim a credit of $2,000 per year on qualifying expenses.

Not only are the AOTC and LLC tax credits costly, but they are also riddled with fraud and abuse. Additionally, these credits are ineffective at achieving their intended goals of increasing college enrollment and making higher education more affordable. The most prudent course of action that policymakers could take would be to fully eliminate these tax credits, raising $130 billion over 10 years. 

Refundable premium assistance tax credit

The tax code provides a credit to any eligible taxpayer for any qualified health insurance purchased through a health insurance exchange. The amount of the credit equals the lesser of (1) the actual premiums paid by the taxpayer for such coverage or (2) the difference between the cost of a statutorily identified benchmark plan offered on the exchange and a required payment by the taxpayer that increases with income. The American Rescue Plan Act of 2021 and the Inflation Reduction Act of 2022 temporarily increased the premium tax credit through 2025. 

This Affordable Care Act (ACA) subsidy is distortionary, leading insurers to raise premiums because consumers are less price sensitive when a subsidy is in place. These distortions create an upward spiral in prices rather than encouraging competition and cost control. This credit should be eliminated, saving $117 billion over 10 years.

Clean hydrogen production credit

This credit provides a subsidy of up to $3.00 per kilogram for hydrogen produced with low or zero greenhouse gas emissions and aims to accelerate the adoption of hydrogen as a clean energy source. However, despite these generous incentives, clean hydrogen remains commercially unviable without government support. The industry is highly dependent on subsidies, as production costs remain prohibitively high requiring expensive infrastructure and energy-intensive processes. This tax credit distorts the market by artificially lowering costs and preventing true competition among energy alternatives. 

Additionally, environmental trade-offs exist—while green hydrogen is promoted as an emissions-free fuel, its production requires vast amounts of electricity and water, raising concerns about its long-term sustainability and scalability. If hydrogen were truly a viable energy solution, it should succeed without government subsidies and compete in the marketplace for energy. Meanwhile, other technologies such as advanced nuclear, battery storage, and grid modernization offer more practical and cost-effective pathways to decarbonization. Taxpayers have already spent billions subsidizing energy technologies that failed to scale, and these funds would be better allocated to broad-based tax reductions or market-driven innovation, rather than propping up an industry that has yet to demonstrate economic or technological viability.  Fully repealing this tax credit would raise $100 billion over 10 years. 

Exclusion of employee meals and lodging

Under current law employer-provided meals and lodging are excluded from an employee’s gross income. This exclusion violates the principle of tax neutrality and favors non-cash forms of compensation over direct wages, thereby encouraging employers to offer perks instead of simply paying higher wages. Furthermore, this provision complicates the tax code by creating special treatment for certain benefits rather than taxing all income uniformly.

By eliminating such exclusions, the tax system would be broader and simpler, allowing for lower overall tax rates and more efficient economic decision‐making. Full repeal would raise $94 billion over 10 years. 

Additional deduction for the elderly

The tax code allows taxpayers who are 65 years or older to claim an additional $1,950 standard deduction (on top of the standard deduction) if single or $1,550 if married in 2024. Special deductions for select groups add complexity to the tax system, making it more prone to inefficiencies. Age-based redistribution is almost always bad policy, especially considering that in the aggregate older Americans are significantly wealthier than younger Americans. What’s more, a deduction for the elderly grants preferential treatment to one demographic over others, violating the principle of tax neutrality. Eliminating this tax expenditure would raise $92 billion over 10 years. 

Exclusion of workers' compensation benefits

Under current law workers’ compensation is not subject to income tax. This exclusion violates the principle of tax neutrality, favoring tax-free fringe benefits over direct wages, thereby encouraging employers to offer perks instead of simply paying higher wages. Further, this provision complicates the tax code by creating special treatment for certain benefits rather than taxing all income uniformly.

By eliminating such exclusions, the tax system would be broader and simpler, allowing for lower overall tax rates and more efficient economic decision‐making. Repealing this exclusion would raise $91 billion over 10 years. 

Exclusion of scholarship and fellowship income

Scholarships and fellowships are excluded from taxable income. Given all the other ways the government subsidizes education, the cleanest option is to remove the tax code from education. This exclusion should be eliminated, saving the treasury $87 billion over 10 years.  

Qualified small business stock exemption

The qualified small business stock (QSBS) exemption allows individuals to exclude 50% of capital gains from the sale of qualified small business stock that has been held for more than 5 years. The excluded gains are taxed at ordinary income rates, but are capped at a 28% maximum tax rate; this rate is 75% for stock issued after February 17, 2009, and before September 28, 2010; and 100% for stock issued after September 27, 2010. A qualified small business is a corporation whose gross assets do not exceed $50 million as of the date of issuance of stock. 

The QSBS exemption adds complexity to the tax code by requiring businesses and investors to meet specific eligibility criteria. The exemption also nudges investors to buy stock in certain small businesses instead of letting capital flow naturally to its most productive use. The QSBS has not increased the flow of equity capital to eligible small firms. The ideal action would be to repeal this provision, thereby raising $81 billion over 10 years. Alternatively, modifying the exclusion to require a seven-year holding period for the full 100% exclusion, a six-year holding period for a 75% exclusion, and a five-year holding period for a 50% exclusion would raise $8.4 billion over 10 years and should be combined with repealing capital gains taxation and allowing businesses to fully deduct their net operating losses. 

Exception from passive loss rules for $25,000 of rental loss

The tax code exempts certain owners of rental real estate activities from “passive income” limitations. The exemption is limited to $25,000 in losses and phases out for taxpayers with an income between $100,000 and $150,000. 

This exemption encourages individuals to invest in rental properties primarily for the tax breaks rather than the economic viability of the investment. Allowing special tax treatment for rental property losses creates an uneven playing field, where rental real estate investors receive preferential treatment over other investors. By subsidizing rental real estate losses, this provision may encourage investment in underperforming or inefficient properties that would not otherwise attract investment.

Instead of subsidizing carve-outs, the US tax code should have lower overall tax rates or a flat tax that eliminates deductions while allowing all investments to compete fairly. Eliminating this provision would raise $77 billion over 10 years, but should only occur if combined with repealing capital gains taxation and allowing businesses to fully deduct their net operating losses. 

Deferral of capital gains from like-kind exchanges

Current tax law allows the deferral of accrued gains on assets transferred in qualified like-kind exchanges. A like-kind exchange, also known as a Section 1031 exchange, is a transaction that allows for the disposal of an asset and the acquisition of another replacement asset without generating a current tax liability from the sale of the first asset. 

By requiring investors to structure transactions carefully to qualify, Section 1031 creates complexity that often leads to loopholes and aggressive tax planning. The ability to defer taxes encourages investors to keep reinvesting in real estate instead of selling and reallocating capital to more productive uses. This "lock-in effect" can prevent capital from flowing to its most efficient use, reducing overall economic productivity. Full repeal of this provision would raise $73 billion over 10 years. Repeal should only be on the table if replaced with repealing capital gains taxation and allowing businesses to fully deduct their net operating losses.

Zero-emission nuclear power production credit

This provision provides a per-kilowatt-hour  (kWh) subsidy for nuclear power plants to keep them financially viable. Some argue that the nuclear energy market should stand on its own without government support, while others claim that the subsidy only benefits existing plants rather than encouraging new nuclear investment. However, this tax credit gives nuclear energy an artificial advantage over other energy sources. When the government picks winners and losers, it risks misallocating resources to less innovative or efficient industries. Government subsidies can reduce incentives for cost-cutting and innovation by allowing companies to rely on tax breaks rather than improving their technology and competitiveness. Eliminating this credit would raise $60 billion through 2033. 

Accelerated depreciation on rental housing

Current law allows depreciation that is accelerated relative to economic depreciation. While repeal of this provision would raise $57 billion over 10 years, it should be replaced with full and immediate expensing of capital investments, including rental housing. Immediate expensing eliminates complex depreciation schedules and applies to all capital investments, thereby allowing the market to allocate resources efficiently. Immediate expensing also allows businesses and real estate investors to deduct costs upfront, improving cash flow and making new investments more attractive.

Parental personal exemption for students age 19 or over

The tax code allows taxpayers to consider their children aged 19 to 23 as dependents, as long as the children are full-time students and reside with the taxpayer for over half the year. This exemption extends financial dependency on parents and, indirectly, on the government through the tax code. 

Special exemptions like this complicate the tax code by requiring taxpayers to track eligibility rules (e.g., full-time student status, income limits, support thresholds). A family with a college student gets a tax break, while a family with a young adult working full time does not. This unequal treatment distorts personal and financial decisions. Instead of reducing the overall tax burden, targeted exemptions reinforce reliance on the government for financial relief. Full repeal would raise $53 billion over 10 years. 

Credit for residential energy efficient property

The current tax code provides individuals with a credit for the purchase of a qualified photovoltaic property and solar water heating property, as well as for fuel cell power plants, geothermal heat pumps, small wind property, and qualified battery storage technology used in or placed on a residence. 

Energy tax credits add layers of complexity to the tax code, benefiting industries with political influence. These credits disproportionately benefit homeowners who can afford energy-efficient upgrades, while renters and lower-income households do not receive the same benefits. Many energy-related tax credits fail to deliver the promised cost savings or emissions reductions, often benefiting manufacturers and wealthy homeowners more than the average consumer. Eliminating this tax credit would raise $50 billion over 10 years. 

Premiums on group term life insurance

Under current law employer-provided life insurance benefits are excluded from an employee’s gross income (to the extent that the employer’s share of the total costs does not exceed the cost of $50,000 of such insurance) even though the employer’s costs for the insurance are a deductible business expense. 

This provision distorts consumer choices by favoring employer-provided life insurance over individually purchased policies. Special tax exclusions like this add complexity to the tax system, requiring additional rules on coverage limits and qualifications. When something is tax-favored, employees may over-consume it, purchasing more life insurance through work than they otherwise would. This creates inefficiencies, as some employees might be better off buying portable, personal life insurance policies that aren't dependent on their job. Repealing this exclusion would raise $48 billion over 10 years. 

Carbon oxide sequestration credit

The tax code allows a credit for qualified carbon oxides captured at a qualified facility and disposed of in secure geological storage. In addition, the provision allows a credit for qualified carbon oxides captured at a qualified facility and used as a tertiary injectant in a qualified enhanced oil or natural gas recovery project.

This tax credit artificially subsidizes certain industries—namely, carbon capture and sequestration (CCS)—effectively picking winners and losers in the energy sector. Large corporations—especially in the fossil fuel and industrial sectors—lobby for these credits, leading to rent-seeking behavior. Many CCS projects are expensive, inefficient, and not widely scalable, yet tax credits encourage their continued use even when market forces might not support them. Additionally, the Section 45Q credit has strict eligibility requirements, leading to legal loopholes and excessive tax planning rather than genuine economic activity. Eliminating this credit would raise $43 billion over 10 years. 

Credit for child and dependent care expenses

The tax code provides a tax credit to parents who work or attend school and have child and dependent care expenses. The credit is equal to 35% of qualified expenditures for taxpayers with incomes up to $15,000. The credit is reduced by one percentage point for each $2,000 of income in excess of $15,000.

This tax credit favors families who use paid childcare over those who choose to have a parent or relative provide care. The government should not incentivize one type of childcare arrangement over another. Instead of favoring daycare and formal childcare services, parents should have the flexibility to make decisions without government incentives distorting their choices. The tax credit also reinforces the idea that families should rely on government tax breaks to afford basic expenses. By artificially boosting demand for paid childcare, the credit may contribute to price inflation in the industry, harming families in the long run. Repealing this credit would save $39 billion over 10 years. 

Tax credit for orphan drug research

Under current law, drug firms can claim a tax credit of 25% of the costs for clinical testing required by the Food and Drug Administration (FDA) for drugs that treat rare physical conditions or rare diseases. 

This tax credit favors one type of medical research—orphan drugs—over others rather than letting market demand and private investment determine where resources should go. The tax credit benefits large pharmaceutical companies that already profit from government intervention including patent protections, FDA exclusivity, and subsidies. Some drug companies may game the system by classifying widely used medications as "orphan drugs" to take advantage of tax credits and market exclusivity. The IRS should not be in the business of subsidizing large pharmaceutical companies carrying out drug research. Eliminating this credit would raise $37 billion over 10 years.

Low and moderate income savers credit

The tax code provides an additional incentive for lower-income taxpayers to save, through a nonrefundable credit of up to 50% on IRA and other retirement contributions of up to $2,000. This credit is in addition to deductions or exclusions. In 2025 the credit is completely phased out by earnings of $79,000 for joint filers, $59,250 for head of household filers, and $39,500 for other filers. 

Should the IRS be subsidizing couples earning up to $79,000 simply because they put money into a retirement account? Saving, spending, and investment choices should be made based on market incentives rather than government subsidies. The Saver’s Credit is non-refundable, meaning that many low-income earners do not actually benefit from it because they have little or no tax liability. Instead of creating a strong culture of personal savings, this credit reinforces the idea that saving for retirement should be government subsidized. Eliminating this credit would raise $35 billion over 10 years.

Exemption of credit union income

In the tax code the earnings of credit unions not distributed to members as interest or dividends are exempt from the income tax. The tax-exempt status of credit unions is rooted in the market need for credit access to low-income households during the Great Depression era. However, credit unions are no longer serving this purpose, their members are mostly upper income, and the industry is competing with private banks, and in some instances even buying banks to expand their membership and services. In the principle of tax neutrality, this exemption should be repealed, raising $32 billion over 10 years. 

Discharge of student loan indebtedness

The current tax code allows certain professionals who perform in underserved areas or specific fields, and as a consequence have their student loans discharged, not to recognize such discharge as income. The policy creates a moral hazard by signaling that student loans might be forgiven without financial consequences. This encourages riskier borrowing behaviors, as students may take on excessive debt expecting future forgiveness rather than making responsible borrowing decisions. The tax exclusion is part of a broader trend where the government distorts the education loan market by subsidizing student debt through tax breaks, forgiveness programs, and direct lending. This inflates tuition prices because universities can raise costs, knowing that students have access to government-backed loans with favorable treatment. The most prudent action would be to eliminate this exclusion, raising $32 billion over 10 years. 

Interest Charge Domestic International Sales Corporations (IC-DISCs)

IC-DISCs allow a portion of income from exports to be taxed at the qualified dividend rate which is no higher than 20% (plus a 3.8% surtax for high-income taxpayers). IC-DISCs artificially favor exporters over domestic businesses, creating an uneven playing field. The IC-DISC structure primarily benefits large businesses and high-income shareholders. The IC-DISC structure requires complex tax planning, accounting, and compliance measures, benefiting large corporations with legal teams while small businesses struggle to navigate the rules. The provision also allows businesses to shift profits into tax-advantaged entities, lowering tax liability without necessarily increasing actual economic output. Repealing this provision would raise $26 billion over 10 years. 

Advanced manufacturing investment credit

This credit provides a per-unit tax credit for the domestic production of key clean energy components, such as Solar panels, wind turbines, battery cells, and critical minerals used in energy storage and electric vehicles (EVs). The provision is supposed to boost U.S. manufacturing of clean energy products by reducing production costs and incentivizing domestic supply chains. The credit artificially lowers production costs for politically favored industries (solar, wind, EVs) while ignoring other energy sectors. Taxpayers are forced to subsidize industries that may not be cost-competitive without government support. Companies receiving subsidies are less motivated to lower costs and improve efficiency since they rely on government assistance. If these industries are truly viable, they should be able to compete without subsidies. It also redirects resources away from other economic priorities or tax relief. Many "clean energy" products still rely on mining and industrial processes with significant environmental impacts. Subsidizing certain technologies (e.g., solar panels) does not guarantee a reduction in overall carbon emissions, especially when production relies on fossil-fuel-based supply chains. Most of the credit benefits large manufacturers and multinational corporations rather than small, independent businesses. It also creates an uneven playing field where smaller firms struggle to compete. Eliminating this credit would save $25 billion over 10 years according to Treasury numbers but could cost up to $183 billion according to other estimates.

Exclusion of reimbursed employee parking expenses

The tax code allows an exclusion from taxable income for employee parking expenses that are paid for by the employer or that are received by the employee in lieu of wages. In 2025, the maximum amount of the parking exclusion is $325 per month. The tax exclusion artificially subsidizes driving by making employer-provided parking tax-free while other commuting methods (such as biking, walking, or public transit) do not receive the same treatment. The exclusion primarily benefits businesses that provide large parking facilities, indirectly subsidizing certain industries and real estate developments. This policy also adds complexity by requiring employers to track and report parking reimbursements properly to maintain tax-exempt status. Full repeal would raise $25 billion over 10 years. 

Premiums on accident and disability insurance

Under current law employer-provided accident and disability benefits are excluded from an employee’s gross income even though the employer’s costs for the benefits are a deductible business expense. This tax exclusion favors employer-sponsored insurance over individually purchased policies, creating an uneven playing field. Employees who get accident and disability insurance through work get a tax break, while those who buy policies on their own do not. The exclusion adds complexity to the tax system, as employers must structure benefits correctly to maintain tax-advantaged status. It also obscures the true cost of insurance, making employees less aware of the value of their compensation and leading to overconsumption of employer-provided benefits. The exclusion discourages individual ownership of accident and disability insurance, meaning that if an employee loses their job, they also lose their coverage. Individuals should be allowed to own portable policies that are not tied to employment. Eliminating this exclusion would raise $23 billion over 10 years. 

Credit for energy efficiency improvements to existing homes

This provision provides a tax credit of up to $1,200 annually for homeowners who make qualifying energy-efficient upgrades, such as installing better insulation, windows, doors, and heat pumps. While intended to reduce household energy consumption, this subsidy distorts the home improvement market by artificially lowering the cost of certain upgrades, often leading to higher prices as contractors and manufacturers adjust to capture the government incentive. The credit also disproportionately benefits wealthier homeowners, as low-income households often cannot afford the upfront costs of these renovations, even with a tax credit. Additionally, the environmental benefits are overstated, as many energy-efficient improvements take years or decades to offset their initial carbon footprint, and homeowners might have made these upgrades anyway. If energy-efficient home improvements truly result in cost savings, homeowners should be naturally incentivized to invest in them without government intervention. A better alternative would be removing regulatory barriers that drive up construction and renovation costs, allowing the free market to develop and adopt energy-efficient solutions organically. Instead of subsidizing select home improvements, taxpayer dollars would be better spent on broad-based tax reductions or deregulation efforts that promote affordability and efficiency for all homeowners. Full repeal of this credit would save $22 billion over 10 years. 

Credit for certain employer contributions to social security

Under current tax law, certain employers are allowed a tax credit, instead of a deduction, against taxes paid on tips received from customers in connection with the providing, delivering, or serving of food or beverages for consumption. The tip credit equals the full amount of the employer’s share of FICA taxes paid on the portion of tips, when added to the employee’s non-tip wages, in excess of $5.15 per hour. This tax credit artificially lowers labor costs for certain employers, creating an unfair advantage for businesses that qualify while leaving others without the same benefit. By offering a tax credit for employer contributions, the government further entrenches Social Security rather than encouraging structural reform. Eliminating this credit would raise $22 billion over 10 years. 

Exclusion of GI bill benefits

Under current law, G.I. Bill benefits paid by the Veterans Administration are excluded from gross income. G.I. Bill benefits typically include educational tuition and fees, as well as housing allowances, and books and supplies stipends.The exclusion creates a tax preference for veterans over non-veterans, violating tax neutrality. Like other education subsidies, the G.I. Bill effectively acts as a government-funded subsidy for higher education, inflating college tuition prices by artificially increasing demand for higher education. Repealing this exclusion would raise $22 billion over 10 years. 

Exemption or special alternative tax for small property and casualty insurance companies

Stock non-life insurance companies are generally exempt from tax if their gross receipts for the taxable year do not exceed $600,000 and more than 50% of such gross receipts consist of premiums. Also, non-life insurance companies with no more than a specified level of annual net written premiums generally may elect to pay tax only on their taxable investment income. In 2024, the premium limit was $2.8 million. This tax provision gives an artificial advantage to small insurance companies, distorting competition by allowing them to operate under a different tax structure than larger insurers. Some insurance entities restructure their operations to qualify for the favorable tax treatment, even when they are not truly "small" in a functional sense. Eliminating this provision would save $21 billion over 10 years. 

Exclusion of employer-provided educational assistance

Employer-provided educational assistance is excluded from an employee’s gross income, even though the employer’s costs for this assistance are a deductible business expense. The maximum exclusion is $5,250 per taxpayer. The exclusion favors employer-sponsored education over other forms of education financing, distorting decision-making. Employees who pursue education independently must pay with after-tax dollars, while those with employer benefits get a tax break. The tax exclusion reinforces the over-reliance on employer-sponsored benefits, making employees dependent on their jobs for education assistance instead of saving or financing it on their own. Like other government education subsidies, this tax exclusion increases demand for higher education while universities raise tuition in response. Repealing this exclusion would raise $18.4 billion over 10 years.

Clean fuel production credit

This provision provides a tax credit of up to $1.75 per gallon for domestically produced low-emission transportation fuels, including biofuels, hydrogen, and sustainable aviation fuel (SAF). This subsidy aims to promote cleaner fuel alternatives, but it artificially lowers production costs, creating a reliance on government support rather than encouraging market competition. Despite years of subsidies for biofuels and alternative fuels, these industries have failed to scale commercially without taxpayer assistance. Many so-called "clean" fuels still require significant land, water, and energy inputs, often offsetting their claimed environmental benefits. The market distortion caused by this credit prevents energy innovation, as companies focus on chasing subsidies rather than improving efficiency or competing based on actual demand. Additionally, the credit disproportionately benefits large fuel producers, while taxpayers bear the cost of subsidizing industries that should be able to compete independently. If clean fuels are truly viable, they should succeed without government intervention. A more effective approach would be removing regulatory barriers and letting energy markets determine the best solutions for reducing emissions. Instead of pouring billions into propping up an industry that has yet to prove its economic sustainability, these funds would be better allocated toward broad-based tax relief or infrastructure improvements that benefit the entire economy. Eliminating this credit would raise $17.5 billion over 10 years.

Excess of percentage over cost depletion, oil and gas

This provision allows certain natural resource producers (oil, gas, coal, minerals, etc.) to deduct a fixed percentage of their gross income from resource extraction, rather than using actual cost depletion. The percentage varies by resource type (e.g., 15% for oil and gas, 10% for coal, up to 22% for some minerals). Unlike cost depletion (which accounts for actual investment in extraction), percentage depletion can exceed the original capital investment, providing an extra tax break. This encourages overproduction of certain resources by artificially lowering costs. Companies extract more than they otherwise would in a competitive marketplace. Other businesses must deduct based on actual costs, while resource companies get a guaranteed percentage-based deduction. This creates a tax loophole that favors specific industries over others. Repealing this provision would save $16 billion over 10 years. This should be replaced with full and immediate expensing.

Exclusion of certain foster care payments

Compensation received for this service is excluded from the gross incomes of foster parents; the expenses they incur are nondeductible.The tax exclusion creates a special financial advantage for foster care payments, while other forms of caregiving (such as caring for elderly family members) do not receive similar treatment. Tax neutrality means the government should not favor one type of income over another. Foster care payments come from government-funded programs, meaning taxpayers subsidize these payments while they remain exempt from taxation. Repealing this exclusion would raise $15.7 billion over 10 years. 

Exclusion of parsonage allowances

The tax code allows an exclusion from a clergyman’s taxable income for the value of the clergyman’s housing allowance or the rental value of the clergyman’s parsonage. The exclusion gives religious leaders a financial advantage that other workers do not receive, violating tax neutrality. The US needs to move toward a tax system where all individuals and professions are treated equally, rather than giving preferential tax treatment to certain workers or industries. Eliminating this exclusion would raise $15.6 billion over 10 years. 

Employer provided child care exclusion

Current law allows up to $5,000 of employer-provided child care to be excluded from an employee’s gross income even though the employer’s costs for the child care are a deductible business expense. The exclusion favors employer-sponsored child care over other arrangements, such as stay-at-home parenting, family-provided care, or independent child care choices. Employees who pay for child care on their own do not receive the same tax benefits, creating an unequal playing field. Employees become dependent on employer-based child care rather than having the flexibility to choose what works best for their family. Full repeal of this provision would raise $15 billion over 10 years. 

Other Dependent Tax Credit (ODC)

Taxpayers with dependents who do not qualify for the child tax credit may be able to claim a maximum of $500 in credits for each dependent who meets certain conditions. Unlike CTC, the dependent can be any age. The ODC distorts financial decision-making by subsidizing certain family arrangements over others. By providing a tax credit for dependent care, the government reinforces the expectation that families should rely on tax breaks for financial relief. Repealing this credit would save $14 billion over 10 years. 

Income of trusts to finance voluntary employee benefits associations (VEBAs)

Employers may establish voluntary employee benefits associations, or VEBAs, to pay employee benefits, which may include health benefit plans, life insurance, and disability insurance, among others. Investment income earned by such trusts is exempt from taxation. This tax exclusion gives preferential treatment to employer-sponsored benefits, distorting the market by encouraging workers to rely on employer-based welfare benefits instead of individual savings and private insurance. The tax benefit ties employee benefits to jobs, making workers more dependent on their employers for healthcare, disability insurance, and retirement security. Eliminating this provision would raise $12.4 billion over 10 years. 

Assistance for adopted foster children

Taxpayers who adopt an eligible child from the public foster care system can receive monthly payments for the child’s significant and varied needs and a reimbursement of up to $2,000 for non-recurring adoption expenses; special needs adoptions receive the maximum benefit even if that amount is not spent. These payments are excluded from gross income under current law. Adoption assistance programs often include tax credits, direct subsidies, and exemptions from taxable income, adding layers of complexity to the tax system. Financial assistance for adopting foster children incentivizes adoption through government subsidies rather than allowing private-sector solutions, charitable organizations, or market-driven alternatives to support adoptive families. Repealing this credit would raise $11 billion over 10 years. 

Tax credits for refueling property

This provision allows a tax credit of up to 30% (capped at $100,000 per location) for businesses and individuals who install alternative fuel refueling infrastructure, including electric vehicle (EV) charging stations, hydrogen refueling stations, and biodiesel, ethanol, and natural gas fueling equipment. While intended to accelerate the transition to alternative fuels, this subsidy distorts the market by artificially lowering costs for select technologies rather than allowing demand to drive infrastructure development. Additionally, the credit primarily benefits large corporations and wealthier individuals, as small businesses and lower-income households are less likely to invest in expensive refueling infrastructure. The environmental impact is also uncertain, as many EV chargers and hydrogen production facilities still rely on electricity generated from fossil fuels, undermining the clean energy argument. If alternative fuel infrastructure is truly viable, private companies should be willing to invest in it without government handouts. A better approach would be reducing permitting and regulatory barriers that slow down infrastructure development rather than subsidizing select industries. Instead of using taxpayer dollars to fund private infrastructure, these funds would be better spent on broad-based tax relief or market-driven solutions that allow for organic growth in the clean energy sector. Repealing this credit would raise $11 billion over 10 years. 

Head-of-household filing status

While the head-of-household filing status is not a tax expenditure in the traditional sense, it is an option that is a low-hanging fruit to repeal and thereby to raise revenues. Repealing the head-of-household tax filing status would raise $209 billion over 10 years. Alternatively, limiting head-of-household status to unmarried individuals with qualifying children under 17 would raise $76 billion.

De Minimis Tax Expenditures Should Be Fully Eliminated

We refer to tax expenditures that cost less than $10 billion over the 10-year budget window as “de minimis tax expenditures.” There are over 70 de minimis tax provisions, which collectively cost about $147 billion over 10 years. Eliminating these provisions should have little-to-no negative consequences for broader policy goals. The following table lists all tax expenditures we recommend fully repealing that fall within this category.