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Major "tax expenditures" - exceptions to general tax policy to benefit specific activities - cost the state treasury $45 billion a year in lost revenue, the Legislature's budget analyst says in a new report.

They range from the $4.3 billion income tax deduction for mortgage interest to a $28 million sales tax exemption for rentals of linen supplies, and while they should be periodically reviewed, the Legislative Analyst's Office says, "evaluations are very hard to do" because assumptions about their effects are difficult to verify.

While critics often decry tax "loopholes," each of the tax expenditures has a base of supporters who benefit, and they are difficult to change. Creating a new one takes only a simple majority legislative vote but legally, erasing one is considered to be a tax increase, thereby requiring a two-thirds vote.

In addition to the mortgage interest deduction, big income tax exemptions include employer contributions to pension and health insurance, $3.5 billion and $3.2 billion respectively, a $2.5 billion "step-up" basis for inherited property, and a $2.4 billion exclusion of Social Security benefits.

The biggest corporate tax expenditure is a $1.2 billion credit for research and development, followed by the $1 billion cost of allowing multi-state corporations to elect whether to use a "single sales factor" in calculating taxable income. The latter was enacted just two years ago, and Democratic legislators want now to repeal it.

The biggest sales tax exemption is for food, pegged at $3.8 billion, followed by exemptions for utility services ($2.4 billion) and prescription medicines $1.6 billion).


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