The Yale Law Journal


Winn and the Inadvisability of Constitutionalizing Tax Expenditure Analysis

26 May 2011

The first such occasion was Rosenberger v. Rector & Visitors of the University of Virginia. In Rosenberger, the University of Virginia denied a religious group monetary support from the “Student Activities Fund.” The Court, also in an opinion by Justice Kennedy, held that this denial violated the “neutrality the Establishment Clause requires.”

Concurring, Justice Thomas sought support for the Court’s conclusion in the teachings of tax expenditure analysis: “A tax exemption in many cases is economically and functionally indistinguishable from a direct monetary subsidy.” From this premise, Justice Thomas concluded that property tax exemptions for churches, upheld in Walz v. Tax Commission of New York, were constitutionally equivalent to the direct monetary outlay to a religious group challenged in Rosenberger. Justice Thomas’s invocation of tax expenditure analysis triggered a rebuttal from Justice Souter who cited Professor Bittker, the leading academic critic of tax expenditure analysis, as having “dispatched long ago” the asserted “equivalence . . . between a direct money subsidy and the [avoidance of] tax liability.”

Winn thus resurrects a question which has lain quiescent since Rosenberger: Does tax expenditure analysis help to decide the constitutionality of tax and direct outlay programs? I am a skeptic. Whatever its value in other settings, in the context of constitutional decisionmaking, tax expenditure analysis has little to contribute. The Court should not constitutionalize tax expenditure analysis. At the end of the day, we do not know what a tax expenditure is. The problem of defining tax expenditures is not one of borderlines and close questions. Rather, at the very core of the concept, there is no satisfactory definition of a tax expenditure.

At one level, tax expenditure analysis has been enormously successful. Tax expenditure analysis today permeates legal scholarship and legal education. When law students are introduced to the federal income tax, tax expenditure analysis is among the first topics they confront. Federal law and the law of many states require the production of “tax expenditures budget[s],” which enumerate the revenue losses attributable to these provisions. As sunlight is indeed “the best of disinfectants,” this is all to the good, creating additional information for legislators and tax policy decisionmakers, information they may (or may not) choose to use.

At another level, however, the flaws in tax expenditure analysis identified by Professor Bittker have never been resolved. The core premise of tax expenditure analysis is that tax provisions can be classified into those that are “normative” provisions necessary for the implementation of the tax and those provisions that are “special” and therefore treated as expenditures. However, no one has yet devised a principled way to implement the distinction between normative and expenditure provisions. As Professor Bittker observed at the birth of tax expenditure analysis, classifying particular tax provisions as expenditures (or not) necessarily involves the drawing of “debatable lines”: “every man can create his own set of ‘tax expenditures,’ but it will be no more than his collection of disparities between the income tax law as it is, and as he thinks it ought to be.”

Consider, for example, the income tax treatment of qualified retirement plans. Among tax expenditure mavens, the conventional wisdom is that the Internal Revenue Code’s current treatment of such plans constitutes a tax expenditure. However, some tax policy criteria, such as administrability and taxpayer liquidity, suggest that the Code’s current treatment of qualified plans is properly viewed as part of a “normative” tax rather than a subsidy operated through the tax system.

The quandaries of defining tax expenditures arise not simply at the margins, but rather at the very core of the concept. We thus find adherents of tax expenditure analysis still debating among themselves how to define tax expenditures—nearly two generations after the concept was introduced.

Tax expenditure analysis has produced useful information for legislators and tax policymakers, highlighting potential tax reforms and revenue raisers. However, if tax expenditure analysis is to be a tool of constitutional analysis, it must meet a higher standard, i.e., it must be reasonably coherent and principled in its guidance to the courts. Tax expenditure analysis does not pass this test.

Consider, for example, a religious group that sincerely concludes that the income tax deduction for ordinary and necessary business expenses violates its religious beliefs: the deduction helps the affluent more than the poor, and the affluent support churches that propound a form of Christianity with which this group strongly disagrees. Do taxpayers holding this religious perspective have standing to challenge the deduction under the Establishment Clause?

If, as Justice Kagan suggests in Winn, the touchstone is tax expenditure analysis, then the answer is “no.” Virtually all tax expenditure adherents acknowledge the deduction for ordinary and necessary business outlays as a normative provision rather than an expenditure. On the other hand, the economic implications of the business deduction are, for these religiously objecting taxpayers, identical to the consequences of the Arizona tax credit for the Winn plaintiffs: both tax provisions “saddle all taxpayers with the cost.”

Or suppose that another set of equally sincere believers objects on religious grounds to the Internal Revenue Code’s current treatment of qualified retirement plans: the benefits of that treatment are heavily skewed in favor of higher income taxpayers who, in turn, support churches that comfort the rich rather than the afflicted. Do these believers have taxpayer standing under the Establishment Clause on the ground that tax expenditure cognoscenti classify current law’s treatment of qualified plans as a tax expenditure? Will these believers subsequently lose their standing if the contrary argument eventually prevails in the tax expenditure literature?

In short, tax expenditure analysis, despite its contribution to tax policy debate, is ill-suited as a tool of constitutional decisionmaking. Sometimes tax provisions are, for constitutional purposes, equivalent to direct monetary outlays; sometimes they are not. That equivalence can only be evaluated on a case-by-case basis, considering the nature of the specific tax provision and the particular constitutional clause at issue. Contrary to the approach of the Winn dissent, the Court is ill-advised to invoke tax expenditure analysis as a tool of constitutional decisionmaking. At the end of the day, we do not know what a tax expenditure is.

Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at Benjamin N. Cardozo School of Law, Yeshiva University.

Preferred citation: Edward A. Zelinsky, Winn and the Inadvisibility of Constitutionalizing Tax Expenditure Analysis, 121 Yale L.J. Online 25 (2011),