There's a couple problems with your line of thought here. I'm not going to defend the drug testing, no matter who it's performed on, because the entire underlying premise that drug users should be treated as criminals as opposed to people who need help is wrong. Leaving that aside, though.
1. The first bolded sentence essentially eviscerates your own argument. The US government can, and has, taxed income up to 100%. It still does, for certain types of income it deems illegal (drug sales income, for example).
I don't think that is a tax - that is a surrender of illegally obtained property. The amount of your income you're allowed to legally keep is a function of governmental discretion. You get to "keep" some because you're allowed to, exactly as you said. If the "government has determined that they should not be taxing that income", it is no different from the government determining a portion of revenues should be paid to welfare recipients, or defense contractors, or whoever.
Just because they both impact revenue doesn't mean they are the same.
2. Every tax expenditure - whether deduction or credit - means that someone else has to shoulder the burden for the tax you're not paying, or the government has to borrow the money.
Not necessarily true - an adjustment to deductions or credits is probably accompanied by other adjustments to other deductions and credits - in an overall plan to adjust tax policy. The overall changes may decrease overall revenue or may increase overall revenue but will, as you point out, shift the burden around among the tax payers according to how their situation fits with the new tax policy. But the other side of the governmental budgeting equation that we haven't mentioned is spending. Instead of borrowing the money or collecting it from someone else, the government could (shocking, I know) decide not to spend money that it doesn't have. So the second bolded sentence applies equally to tax expenditures as it does to welfare payments. I pick on the MID because it's easy to create examples - two taxpayers can be situated exactly the same, neighbors on the same street, but one rents and one owns their cookie cutter house. The renter is obligated to pay the property tax
Is this true? I have never heard of that and am pretty sure I didn't when I was a renter? and maintain the property, so the distinction between the two is minimal. Yet the renter is required to pay more income tax than the owner. Why? Because the government has decided it should be so, just as it has decided that feeding kids with food stamps should be done. The distinction you are trying to make is a distinction without a difference.
3. Third bolded sentence: some tax expenditures are in the form of refundable tax credits, which means a person can receive these credits even if they have no taxable income, so they receive a net disbursement/expenditure of government cash. That is even more clearly a situation where the tax expenditure is money taken from all the taxpayers and given to a few. The EITC is the most well known example, but there are others and not all of them are targeted at poor people. Some examples from the 2012 tax year
http://www.candofinance.com/taxes/refundable-tax-credits/
4. Finally, once again, the impact of a tax expenditure and a direct payment on the federal budget are exactly the same. Both reduce the amount of revenue available to the government to pay for jet fighters and FBI agents and customs inspectors and interest on the national debt. Without tax expenditures, the rate of tax applied could be significantly lowered while revenue remains the same.
It would all be the same game, though - just moving tax policy around to differently allocate the burden. Some people would pay less, some would pay more. Those who don't qualify for the tax expenditure pay a higher rate of tax because of the existence of the tax expenditures. All tax expenditures represent one group of taxpayers subsidizing another group.
Taxpayers are free to change their behavior to better position themselves to take advantage of current tax policy.
I don't expect to convince you of the truth of this argument, because I have found that posters with a known conservative bent are completely immune to logic on this subject. The emotional resonance of the argument "it's my money and I should get to keep it" always defeats logic on this topic. I've said my piece until this comes up in another few months when I'm bored at work.
