Pushback on info reporting

I have blogged multiple times (I’ll forgo links) about the need for better IRS funding and improved compliance – not just better IT systems but more robust information reporting, such as Rossoti et al have been promoting (originally recommended by the Bush tax reform panel). Better tax compliance is one of the best forms of federal aid (indirect or implicit) to states, especially states like Minnesota that rely heavily on income taxes. Reducing underreported income immediately yields own-source revenue – most clearly income taxes but there will be a halo effect on sales tax revenues as well. If businesses are underreporting income, there’s a good chance they’re underreporting taxable sales too. So, even states without income taxes will benefit.

The Biden Administration, as I have noted before, adopted a lite version of Rossoti’s expanded information reporting. The House Ways & Means tax proposal includes expanded IRS funding, but not Biden’s information reporting proposal. The Senate remains a possibility. The IRS already could do much of this administratively, but I gather some high level person(s) has decided that is path not to be taken. I get that – it only works if combined with adequate, reliable, and ongoing funding that Congress must provide (IRS compliance is not as high a priority as a border wall).

Enacting it won’t be easy. Politico reported in May that expanded IRS funding (not even the expanded information reporting) generated counter advertising by GOP groups in Ohio. The New York Times published a story on the lobbying campaign opposing Biden’s information reporting on bank flows for businesses. Kate Kelly and Alan Rappeport, Biden’s Proposal to Empower I.R.S. Rattles Banks and Their Customers (Oct. 11, 2021). If you have a Times subscription, it’s worth reading the whole thing. I’ll paste in excerpts below to provide a flavor of what Congressional proponents of more reporting will face:

To help find [billions of dollar of unpaid taxes], the administration wants banks to give the Internal Revenue Service new details on their customers and provide data for accounts with total annual deposits or withdrawals worth more than $600. That has sparked an uproar among banks and Republican lawmakers, who say giving the I.R.S. such power would be an enormous breach of privacy and government overreach.

Banks and their trade groups are running advertising and letter-writing campaigns to raise awareness — and concern — about the proposal. As a result, banks from Denver to Philadelphia say they are being deluged with calls, emails and in-person complaints from both savers and small-business owners worried about the proposal. JPMorgan Chase & Company has issued talking points to bank tellers on what to tell angry customers who call or come into a branch to complain. ***

The outcry over the proposed measures stems in large part from a carefully planned lobbying campaign by the banking industry, which has spent months raising awareness and opposition to the plan in cities and towns across the country.

Banks say the reporting requirements would raise their costs and put them in the unenviable position of handing customer information over to the I.R.S.

Top industry trade groups have hammered the proposal in emails and phone calls to members. They have argued their case in meetings with senior administration officials, including Ms. Yellen and Charles P. Rettig, who runs the I.R.S. They established a social media hashtag, #KeepMyBankingPrivate, that some executives have used in sharing their doubts about the proposal. ***

Awareness of the proposal has been amplified by ad campaigns, conservative news media coverage and Facebook posts, including one that caught the attention of Crystal Causey, a 39-year-old advertising account executive in Los Angeles.

“I wouldn’t allow my husband or my parents to monitor my bank account activity,” she said in an email. “There’s no way I would be OK with the government monitoring it.”

Industry representatives say it is unusual to see banks communicate with their account holders on a political matter. “This is the first time in 20 years that I’ve seen that banks have reached out to inform their customers on an issue” like this, said Paul Merski, who runs congressional relations for the community bankers association. ***

Ms. Castilla [a community banker in Oklahoma] said a local schoolteacher had stopped by her office two weeks ago to share her anxieties about the idea of the government peering into her financial records. She told the teacher she believed the proposal was an overreach, Ms. Castilla recalled, and added that banking associations and Oklahoma’s congressional delegation were fighting it.

Even if the dollar threshold were raised to $10,000, Ms. Castilla said, it would still be onerous for her bank. “This would require a massive amount of infrastructure,” she said. ***

Treasury officials say they are flummoxed by the outrage, given that banks of all sizes initially told them they could comply with the rules, which would not take effect until 2024.

“They have made clear during conversations with banks that firms can easily implement a simple proposal like the one under consideration in Congress, and that any compliance costs would be minimal,” said Ms. LaManna, the Treasury spokeswoman.

Kate Kelly and Alan Rappeport, Biden’s Proposal to Empower I.R.S. Rattles Banks and Their Customers (Oct. 11, 2021)

Some random observations

• The lobbying campaign and the resulting reaction is no surprise. I knew that getting something like this through Congress in the current environment with razor thin partisan margins and uber, unthinking tax aversion would not be easy.
• The legions of trade associations and lobbyists in DC likely view this as just another opportunity to prove they are worth their 7-figure salaries and massive fees. Killing it will be another notch in their lobbying cred belts.
• Nowhere does the article even mention that the reporting requirement is targeted at businesses. (Obviously, there is an issue about how the proposal requires financial institutions to identify business accounts. I have not dug into that – I’m waiting for a credible congressional proposal before ferreting through the details.) The reference to households and the anecdote of complaints by a schoolteacher (I suppose she could be a Mary Kay or Amway distributor in her spare time) seem likely to mislead in that regard.
• More fundamentally, I think it reflects a basic disconnect between paying taxes and funding government that has become a cancer on the tax and budget legislative processes at the federal level. The old conventional wisdom was that if scofflaws avoided paying taxes, the compliant would be stuck making up the difference. Implementing reasonable measures to get them to pay was a better alternative than piling more burden on those who can’t cheat (W-2 wage earners and recipients of 1099 interest and dividends) or don’t. Dealing with the cost and inconvenience of more information reporting was preferable to higher rates or expanding the base. The new wisdom seems to be that will just force more borrowing and nobody (well some future generation?) will pay. A good possibility is that it will force explicit tax increases – higher rates or corporate base expansion, if the Dems are as concerned as they claim to be about minimizing increases in debt and the deficit. At least, I can’t imagine that killing it will reduce the eventual size of the package, just how much is deficit financed or with explicit taxes.
• UGH