IRS funding

After passage of the Inflation Reduction Act’s (IRA’s) increase in IRS funding, I thought I could put one of my favorite hobby horses in the paddock for a long period of time. But recent events compel me to fetch and remount the old nag.

The ink was barely dry on the IRA before the GOP was successful in the debt ceiling deal of chipping away at its refunding and potential revitalization of IRS. The cuts probably will not have an immediate effect on service or audits but will move up the day of reckoning when Congress needs to appropriate a lot more money to ensure modernization of IRS’s IT systems. This Tax Law Center report has the details, especially the crucial “side deal..” Incongruously for a deal to reduce debt, the cuts in IRS funding will increase deficit spending. As the Tax Law Center Report puts it:

Although the law suspending the debt limit is called the “Fiscal Responsibility Act,” cutting IRS funding is not fiscally responsible – it increases the deficit. CBO has estimated that, by decreasing the number of enforcement actions and reducing revenue collections, the immediate $1.39 billion rescission would increase the deficit by $900 million between FY2023 and FY2033.28 It has also estimated that, in combination with the $1.39 billion rescission, an additional $20 billion in cuts to IRS mandatory spending under the side deal will increase deficits by $19 billion over the next ten years.

Tax Law Center, Debt Ceiling Deal’s Cuts to IRS Funding Bring the IRS Funding Cliff Closer, p. 9 (6/28/23).

(More evidence for the strongly positive returns on audits – perhaps more than the CBO methodology estimates – can be found in this relatively new NBER paper, which finds a 12:1 return ratio for audits of high-income filers and positive returns generally. It focuses on the differential effects by income levels. Perhaps fodder for a forthcoming post.)

The IRS cuts were apparently necessary to satisfy GOP bugaboos and get a debt ceiling deal. I don’t fault the administration for agreeing to the deal to prevent the economic catastrophe that a default would be. The lesser of two evils. But it is foolish if the stated goal is to get federal debt under control.

After getting that deal, House Republicans immediately started phase 2 of the unwinding:

On Thursday [June 20, 2023], a House appropriations subcommittee marked up a bill covering Internal Revenue Service funding for fiscal 2024. This legislation would slash more than $1 billion — roughly 9 percent of annual funding — from the agency relative to last year. After adjusting for inflation, the IRS would be down to its lowest annual appropriations levels so far this century.

Catherine Rampell, It’s almost like the House GOP never cared about deficits after all, WaPo (6/25/2023).

Treasury’s response

The Treasury Department projects that this latest GOP proposal to siphon resources away from IRS enforcement would result in an $8.6 billion loss of revenue, by limiting the agency’s ability to audit high-income and corporate tax dodgers.

Id.

Meanwhile, Ron DeSantis appears to be proposing to abolish the IRS altogether. Is he planning to outsource federal tax collections to the states (FAIR Tax may haps?) or tax farmers or run the federal government on donations?  Oy and he is the candidate that big Republican donors have flooded with money to take down Trump. His theory must be you need to out-crazy Trump to win? Or this is just a Hail Mary pass by a candidate who is down by three touchdowns in the polls (WaPo)?

On one level for a centrist like me, it’s hard to take this stuff seriously. On another level, it says a lot about how partisan funding of the IRS has become and how deeply in trouble the country is. I see three possible narratives with my wild guesses at the probabilities:

1. The debt ceiling deal is the first installment in death by a thousand cuts. The GOP maintains control of one house of Congress or the presidency and regularly demands cuts in the IRA’s funding over several cycles. Slowly IRS appropriations revert to 2016 real levels with modest modernization of its systems (65%).
2. The GOP wins the presidency and control of both houses of Congress in the 2024 election and repeals the IRA’s unspent appropriations and returns IRS funding to the average of the Trump years (30%).
3. Dems win the presidency and control of both houses of Congress in 2024 or 2026 and restore IRA’s funding (5%).

My hobby horse is looking more and more like Rocinante and I probably should start looking for a sidekick named Sancho. (My apologies for changing horse metaphors midstream.)