Definition and criteria

This section lays out a potential tax expenditure definition. Normative benchmarks required for the second tax policy report will not be covered in this paper.

This paper proposes that New Zealand define a tax expenditure as:

“... a tax provision significantly motivated by a policy objective other than to raise revenue that: reduces revenue by lowering tax for a limited or select group of taxable entities; is able to be replaced by a direct expenditure programme; and is neither administrative in nature or motivated by a domestic double taxation objective”

The five key criteria included in this definition are discussed below. Table three provides an illustration of how the criteria could be applied.

1.  Non-revenue policy objectives

TEs are significantly motivated by policy objectives that are tangential to the Tax Act's stated revenue raising focus.

“Significantly motivated” does not require that a non-revenue policy objective is the only motivation. An element of judgement will be required where tax provisions have multiple objectives.

2.  A reduction in revenue

Spending reduces the funds available for other projects. Tax expenditures decrease revenue, while direct spending affects the operating balance (deficit/surplus) through an increase in government expenditure. Thus, both have the same net effect.

3.  A limited or targeted group of taxable entities

Tax expenditures should be limited to, or targeted at, either:

• a small group of economic entities; or
• some specific form of economic activity.

Policy-motivated tax provisions that are generally applicable to all taxpayers would not be classified as a TE as, under the proposed approach, an alternative tax treatment is needed.

4.  Able to be replaced by direct spending

Tax expenditures, as the conceptual equivalent of spending, should be able to be replaced with a direct expenditure programme.

Some countries that use a normative tax benchmark also report “over taxation” as a negative tax expenditure. High excise taxes that exceed common tariff rates could be an example. High taxation would not be included in this definition as high tax has no conceptual equivalent in spending terms. These taxes are published elsewhere.

5.  Administrative and domestic double tax measures

The final two criteria are aimed at removing provisions that are motivated by either administrative simplicity or double taxation.

Administrative provisions would not be reported as they are technical tax provisions that specify how tax is collected. Individuals are often excluded from tax where collecting the tax may be uneconomic or practically impossible.[13] Reporting administrative provisions is unlikely to add value to domestic policy debate.

Double taxation provisions would not be reported as they seek to align effective tax rates between different tax structures. For instance imputation credits align tax on investment income with personal tax rates. This is not motivated by any alternative policy goal.

Table 3 - An illustrative use of tax expenditure criteria

Tax features	Non-revenue raising objective	Reduces potential revenue	Targeted at a limited group or activity	Able to be replaced by a direct expenditure programme	Not  an administrative or a double taxation measure	Status
R&D tax credits						Tax expenditure
Expensing of forestry capital improvements (Planting Costs)						Tax expenditure
House holding tax credit						Tax expenditure
Trusts						Structural
Imputation credits						Structural
Portfolio Investment Entities (PIEs)						Structural
Progressive tax rates						Structural
Lack of capital gains tax						Structural

A tick and a cross indicates that the primary purpose of the tax feature is debatable