Tax expenditures: report utilization by state policy makers

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Virginia Tech

Tax expenditures are deviations from a normative tax structure which take the form of exemptions, deductions, credits, etc. Tax expenditure reports show estimates of revenues foregone from tax expenditures.

This study investigated report use in ten states by (1) examining tax expenditure reporting processes and report use and (2) applying three path models of technical information use to tax expenditure reports. Data were gathered from report preparers-legislative staff persons and legislators.

The adoption of recommended standard features was examined. Commonly adopted core features and innovative features were identified. Examination of tax expenditure reports and reporting processes supports the following findings:

(1) The tax expenditure concept has broad acceptance. (2) Reporting achieves an educational objective by facilitating an understanding of tax structure. (3) Use of reports is consistent with the use of technical information in general. (4) Legislators and staff persons share similar perceptions on reporting. (5) The practice of formally comparing tax and direct expenditures has not been widely adopted. (6) Awareness of tax expenditure costs may protect revenues by fostering resistance to new tax expenditures.

In the three specified path models of information use, the dependent variable is level of report use. The independent variables in each model represent three theory of information use. The most paths were retained as significant in the information specific model, but the individual attribute model explained the highest percentage of variance in level of use (28.1%). The role constraint model was unsupported. A final combined model, explaining 34.3% of variance in level of use, shows that the information specific and personal attribute models are related. In the combined model: (1) report usefulness has the largest direct and total effect on level of use, (2) the exogenous variables, quality of report communication and fiscal analysis attitude affect report usefulness by affecting the intervening variables, relevance of report and technical quality of report. This suggests report preparers may influence marginally report use by improving report communication and technical quality of reports.