Tax expenditures are a significant part of America’s tax code, playing a major role in the country’s economy. Sometimes referred to broadly as “loopholes” or “tax breaks,” tax expenditures are preferences built into the code to encourage certain behaviors and activities that the government feels are important by making them more affordable for certain individuals and businesses. Tax expenditures come in a variety of forms including:

• Tax exclusions allow certain categories of income to go untaxed (e.g., active duty pay earned by military personnel in a combat zone is not subject to taxation).
• Tax exemptions shield the income taxpayers earn from certain assets from taxation (e.g., individuals can exempt interest earned from some state or local bonds, and some charitable organizations are exempt from paying income and property taxes).
• Tax deductions allow taxpayers to deduct expenses from their taxable income (e.g., deduction on medical expenses in excess of 7.5 percent of one's individual income).
• Tax credits reduce the amount of taxes owed. Refundable credits provide cash back to the taxpayer when taxes owed are less than the credit due.

From an economic standpoint, tax expenditures are very similar to government spending. They are policy choices intended to encourage certain behaviors, and have significant influence over decisions made by individuals and businesses in the economy. For example, the mortgage interest deduction was intended to support homeownership, and the exclusion of employer-sponsored health insurance was meant to support companies covering their employees’ health care. In this way, expenditures are, in essence, spending through the tax code.

It is difficult to precisely track and evaluate the efficiency of tax expenditures, as many beneficiaries might have engaged in the desired behavior (e.g., buying a home) without the added tax incentive. And like spending, tax expenditures result in lost revenues and higher deficits for the government. In fiscal year 2025, tax expenditures totaled $2.2 trillion — which is more than the government spends on any major program.