Which of the following is considered a tax expenditure?

A tax expenditure refers to a provision in the tax code that allows individuals or businesses to reduce their tax liability, essentially functioning like a subsidy. This can include various deductions, credits, or exemptions that lead to a decrease in the amount of tax that would otherwise be owed.

The deduction for home mortgage interest is a prime example of a tax expenditure. It allows taxpayers to deduct the interest paid on their home mortgage from their taxable income, which effectively reduces their overall tax burden. This kind of incentive is intended to encourage home ownership and can be classified as a government expenditure because it represents revenue that the government forgoes as a result of enabling this deduction.

In contrast, capital gains tax pertains to the taxation of profits made from the sale of assets and does not constitute a tax expenditure in itself; rather, it is a source of tax revenue. Service charges on property assessments are fees for services provided and do not have the characteristic of reducing tax liability. The establishment of new tax incentives, while potentially creating future tax expenditures, is not considered a current tax expenditure until it is enacted and affects taxpayers in a way that decreases their tax obligations.

Thus, the deduction for home mortgage interest directly reduces tax liability and is classified clearly as a tax expenditure.