Measuring state income tax expenditures: A pragmatic view of income tax base erosion

This paper presents a pragmatic methodology for calculating the extent of income tax expenditures and hence tax base erosion among the diverse individual income tax bases of different jurisdictions. Previous tax expenditure theory is extended by incorporating and evaluating the amount of politically unavoidable tax expenditures, the neglect of which results in an unrealistically high comprehensive tax base standard. An index of the relative tax expenditures is constructed for each state and compared with the Federal index as a benchmark. Results indicate that the extent of income tax expenditures across states varies by a factor of greater than three. The eight states that exhibit significantly low use of tax expenditures have simple tax structures. The five high tax expenditure states, although exhibiting substantial conformity with the Federal tax code, allow further erosion particularly at the post-AGI stage.