Description of 32 Major Tax Subsidies for Tax Expenditure Madness Bracket
Learn more before you vote for the worst tax expenditure.
Below are short descriptions and suggested readings for additional information on 32 categories of tax expenditures for the Liberty Taxed “Tax Expenditure Madness” X tournament. The selected items are the most expensive, economically distortionary, and targeted tax expenditures that are genuine tax loopholes. The descriptions below are brief and intended to highlight why critics may think the credit deserves to be repealed. The estimates of revenue losses are over ten years and primarily from Treasury’s tax expenditure tables, measured from a current law baseline. Current policy estimates are used for several major expiring provisions where noted. Internal Revenue Code sections are listed after the provision name.
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Energy Subsidies
1. Electricity production tax credit (45Y): $459 billion. Tax credits for electricity producers generating power with zero or very low greenhouse gas emissions, including renewables, advanced nuclear, or other clean technologies. The subsidies encourage investment in non-fossil fuel electricity sources, which can raise electricity costs when paired with other regulatory requirements and lead to energy grids with less reliable energy sources. By 2050, this credit could cost between $1.4 and $2.4 trillion.
2. Electricity investment tax credit (48E): $148 billion. Tax credits for businesses investing in electricity generation and storage projects with zero or very low greenhouse gas emissions. Taxpayers can generally choose between the production tax credit, which typically pays out over 10 years, or an upfront investment tax credit of 30 percent of qualifying investments. By 2050, this credit could cost up to $1.1 trillion.
3. Advanced manufacturing production credit (45X): $193 billion. Tax credits for domestic manufacturing of renewable energy components, such as solar panels, wind turbines, and batteries, and domestic production and processing of critical minerals. Proponents argue that subsidizing domestic manufacturing and mining will increase supply chain resilience. However, it can also make supply chains more vulnerable by limiting global diversification and misallocating domestic investment activity away from its highest value use.
4. Nuclear power credits (45J, 45U): $92 billion. Tax credits for nuclear power facilities to encourage continued operation and development of new nuclear facilities that provide a low-carbon, reliable energy source. Even with subsidies, costly regulatory barriers, waste management challenges, safety concerns, and cheaper alternative energy sources undermine the technology's viability.
5. Clean vehicles and refueling credits (25E, 30C, 30D, 45W): $217 billion. Provides consumer and business credits for purchasing electric or alternative-fuel vehicles and installing refueling infrastructure. The credits are intended to accelerate the transition to subsidized transportation alternatives, such as electric cars. Credits often disproportionately benefit wealthier households, with limited environmental benefits per subsidy dollar.
6. Hydrogen and other clean fuel credits (45V, 45Z): $92 billion. Tax credits for producing low-carbon hydrogen and other alternative fuels, such as biofuels. The credits support emerging energy technologies that could reduce fossil fuel emissions. In many cases, these credits subsidize technologies that are only viable with massive subsidies and prop up unproven technologies, risking taxpayer funds without guaranteed outcomes.
7. Residential energy efficiency credits (25C, 25D, 45L): $145 billion. Provides homeowners and homebuilders with credits for energy-efficient improvements and renewable energy systems in homes. These credits mostly benefit higher-income individuals, have potentially negative lifecycle impacts, and, at best, modest environmental impact relative to cost.
8. Carbon sequestration credit (45Q): $40 billion. Tax credits for capturing and storing or using carbon dioxide emissions to encourage the development of carbon capture technologies that reduce industrial emissions. The subsidized technology has not yet been proven economically viable and may inadvertently prolong dependence on fossil fuels by subsidizing carbon-intensive processes. This credit is in addition to existing subsidies for CO2 recovery such as the Carbon Dioxide Enhanced Oil Recovery program.
For an in-depth analysis of the cost of energy subsidies and the budgetary cost of the Inflation Reduction Act, read Cato Policy Analysis No. 992 by Travis Fisher and Joshua Loucks.
Business Subsidies
9. Research and development tax credit (41): $409 billion. Business tax credit based on qualifying expenditures for research and experimentation activities to encourage spending on under-invested research activities that may have positive externalities not captured by the firm. The research credit is poorly targeted, overly complex, and primarily subsidizes activities businesses would undertake without the subsidy.
Putting the Research Tax Credit to the Test
Martin A. Sullivan, Tax Notes
10. Low-income housing tax credit (42): $168 billion. Tax credit for developers and investors who finance housing for low-income households to expand private-sector involvement in affordable housing construction and preservation. The credit is costly, complex, corruption-prone, and primarily benefits investors instead of low-income residents.
Low-Income Housing Tax Credit: Costly, Complex, and Corruption-Prone
Chris Edwards and Vanessa Brown Calder, Cato Institute
11. Orphan drug tax credit (45C): $37 billion. Tax credit for pharmaceutical companies conducting clinical testing for treatments of rare diseases. The credit incentivizes drug development for diseases that may not otherwise attract private investment due to limited markets. The subsidy is poorly targeted, often accruing to “blockbuster” drugs with broad market appeal. To the extent the subsidy shifts resources away from drug development for larger populations, it could have consequential negative welfare implications.
The US Orphan Drug Act: Rare Disease Research Stimulator or Commercial Opportunity?
Olivier Wellman-Labadie and Youwen Zhou, National Library of Medicine
12. Credit union exemption (501(c)(14)): $32 billion. Exempts credit unions from federal income tax to promote member-owned financial institutions. The exemption provides an unfair competitive advantage over direct competitors, such as community banks, that are taxed like all other financial institutions.
After 90 Years, It Is Time to Wean Credit Unions off Taxpayer Subsidies
Scott Hodge, Tax Foundation
13. Advanced semiconductor manufacturing credit (48D): $25 billion. Investment tax credit for businesses establishing or expanding semiconductor manufacturing facilities in the US to strengthen domestic semiconductor supply chains. These subsidies represent an ineffective industrial policy that has historically failed to revive struggling industries and created unintended problems for domestic and global economies.
Made in America: The Boom in US Manufacturing Investment
Scott Lincicome, Cato Institute
14. Opportunity Zones and other place-based tax preferences (Subchapter Z, 45D, 1396): $36 billion. Tax incentives for investment in economically distressed communities, including credits for community development (New Markets Tax Credit) and capital gains tax advantages in designated Opportunity Zones. Intended to drive investment and economic revitalization in underserved regions, these programs primarily benefit wealthy investors and developers, and usually lead to minimal lasting economic benefits for local residents. Under current law, these programs largely expire, and as OZs phase out, they raise revenue. Revenue estimate reflects cost of renewing the NMTC and OZs with no phase-out.
Opportunity Zones: Understanding Them in the Context of Past Place-Based Incentives
Joel Griffith and Adam Michel, The Heritage Foundation
15. Historic rehabilitation tax credit (47): $9 billion. Tax credit for investments made to rehabilitate and preserve historically significant buildings. By subsidizing the preservation of smaller, old buildings over larger-occupancy new construction, the credit likely suppresses housing supply and raises housing prices.
Historic Preservation: Bad for neighborhood diversity
Emily Hamilton, Market Urbanism
16. Pass-through deduction (199A): $684 billion. Tax deduction for pass-through businesses (partnerships, LLCs, S-corporations) equal to 20 percent of certain types of non-salary business income, reducing most pass-through’s top marginal tax rate from 37 percent to 29.6 percent. The deduction is overly complex and not necessary for tax parity with larger C corporations in most circumstances. Pass-through deduction expires in 2026. Revenue estimate reflects current policy.
Kyle Pomerleau, American Enterprise Institute
Family Subsidies
17. Earned income tax credit (32): $822 billion. Refundable tax credit for low-income working individuals and families, scaled by income level and family size to encourage workforce participation and alleviate poverty. The complexity of the earned income tax credit leads to significant improper payments, and its economic distortions—such as disincentivizing additional work hours or the pursuit of higher-paying jobs—may outweigh some of the benefits of the credit.
Earned Income Tax Credit: Small Benefits, Large Costs
Chris Edwards and Veronique de Rugy, Cato Institute
18. Child tax credit (24): $1,261 billion. Partially refundable tax credit of up to $2,000 for each dependent child under 17. The credit is designed to support families and encourage work attachment. Most of the benefits accrue to middle-class families without meaningfully changing total fertility rates or effectively alleviating poverty. Under current law the credit value falls to $1,000 per child in 2026 and reduces revenue by $513 billion. Extension of current policy reduces revenue by roughly $1.3 trillion over ten years.
The Case Against the Child Tax Credit
Adam Michel, Liberty Taxed
19. Special larger guaranteed deductions (2(b), 63(f)): $343 billion. Head of household status for single parents includes a larger standard deduction. The additional deduction for the elderly and blind allows an add-on deduction of as much as $1,950, depending on circumstances. These special deductions complicate the tax code, can create marriage penalties, and are duplicative of numerous other tax preferences.
Repealing Head of Household Filing Status: Details and Analysis
Erica York and Garrett Watson, Tax Foundation
20. Child and dependent care tax credit (21): $39 billion. Tax credits for child and dependent care expenses incurred by working individuals. The subsidies may offset a cost that is a barrier to parental employment but, without sufficient supply, drive up childcare costs and undermine any benefits from the subsidy.
Government Childcare Subsidies: Whom Will They Help Most?
Rachel Greszler, The Heritage Foundation
21. Saver’s credit (25B, 45E): $35 billion. Tax credit for low- and moderate-income taxpayers who contribute to retirement accounts to encourage retirement savings. The subsidy has limited effectiveness for individuals with insufficient disposable income and may harm life-cycle well-being by incentivizing over-saving and substituting toward debt to finance consumption.
Adam N. Michel, Cato Institute
22. Adoption and foster care benefits (23, 131, 137): $31 billion. Tax credits and exclusions to subsidize expenses associated with adopting children and providing foster care. These incentives are overly complex, leading to high IRS audit rates, and have uncertain effectiveness in increasing adoption rates.
Adoption Tax Benefits: An Overview
Margot L. Crandall-Hollick, Congressional Research Service
23. Employer-provided childcare credit and exclusion (45F, 129): $15 billion. Businesses tax credit for establishing childcare facilities and an income tax exclusion for employees receiving employer-provided childcare benefits. Encourages employers to compensate employees with childcare services over cash wages, which tends to benefit higher-income employees in traditional work arrangements.
Government Childcare Subsidies: Whom Will They Help Most?
Rachel Greszler, The Heritage Foundation
24. Paid family leave credit (45S): $5 billion. Tax credit to incentivize employers to provide paid family and medical leave. While intended to encourage broader availability of paid leave without imposing mandatory requirements, a majority of the expenditure likely accrues to firms already offering paid leave benefits, and government-subsidized leave may result in compensation reductions and reduced professional opportunities for women. Under current law the credit expires in 2026. The revenue estimate assumes current policy continues.
Parental Leave: Is There a Case for Government Action?
Vanessa Brown Calder, Cato Institute
Subsidies for Education, Health Care, Housing, and States
25. State and local tax deductions (164): $2,307 billion. Allows individual taxpayers who itemize and corporations to deduct state and local taxes from federal taxable income. Individual SALT deductions are limited to $10,000 through 2025. The corporate deduction is unlimited. The deduction creates an implicit federal transfer to states with higher deductible tax burdens. Revenue estimate assumes current law.
Understanding SALT and The Case for Repealing the Corporate SALT Deduction
Adam Michel, Liberty Taxed
26. Mortgage interest deduction (163(h)(3)): $904 billion. Allows homeowners who itemize to deduct interest payments on mortgages for primary and secondary residences, subject to certain limits. The deduction lowers taxes for homeowners but is generally not associated with higher homeownership rates. Instead, it subsidizes larger houses for older, higher-income taxpayers. Revenue estimate assumes current law.
Priced Out: Why Federal Tax Deductions Miss the Mark on Family Affordability
Joint Economic Committee, Republicans
27. Medical expense deduction (213): $243 billion. Allows an itemized deduction for medical expenses exceeding 7.5 percent of adjusted gross income to provide a subsidy for individuals facing substantial healthcare costs. The deduction primarily benefits higher-income households and represents an additional subsidy for medical spending, in addition to numerous other tax and direct government subsidies.
End the Tax Exclusion for Employer-Sponsored Health Insurance
Michael F. Cannon, Cato Institute
28. Tax credits for post-secondary education (25A): $125 billion. The American opportunity and lifetime learning tax credits offset a portion of higher education expenses, potentially helping to expand access. However, these subsidies likely contribute to inefficiently high levels of spending on higher education, significant student debt burdens, and demand for additional government intervention in higher education.
14 Ways the Tax Code Subsidizes Higher Education
Adam N. Michel, Cato Institute
29. Exclusion of education benefits from taxable income (117, 134, 127): $127 billion. The tax code generally excludes scholarship and fellowship income, GI bill military benefits, and employer-provided educational assistance from taxable income. Excluding education benefits from income provides an implicit subsidy and encourages compensation through education subsidies. These subsidies likely lead to overconsumption of education services, tuition inflation, and reduced employee cash wages.
Neal McCluskey, Cato Institute
30. Deductibility of student loan interest and discharge of student loan indebtedness (221, 108(f)): $64 billion. Allows taxpayers to deduct interest on qualified student loans and excludes certain discharged student loan debts from taxable income. These provisions subsidize reliance on loans to finance higher education expenses and likely contribute to higher tuition prices.
14 Ways the Tax Code Subsidizes Higher Education
Adam N. Michel, Cato Institute
31. Exclusion of employer-provided health insurance and other fringe benefits (106, 132): $3,926 billion. Exempts employer-sponsored health insurance and certain other benefits, such as transportation assistance, meals, and on-site gyms, from employees’ taxable income. Excluding non-wage compensation from income incentivizes employers to pay employees with untaxed services over taxable wages, making employment arrangements less flexible and excluding taxpayers with non-traditional work arrangements. For health care, it incentivizes inflexible health benefits, ties insurance coverage to the traditional employer-employee relationship, and contributes to higher healthcare spending.
End the Tax Exclusion for Employer-Sponsored Health Insurance
Michael F. Cannon, Cato Institute
32. Exclusion of interest from municipal bonds (103): $470 billion. Makes interest income on state and local government bonds issued to finance infrastructure investments generally tax-free for the lender. The exclusion lowers borrowing costs for state and local governments, encouraging excessive government borrowing and crowding out private infrastructure alternatives that have higher financing costs.
Reexamining the Tax Exemption of Municipal Bond Interest
Scott Greenberg, Tax Foundation