GOP attack on IRS funding runs counter to deficit reduction effort

The GOP is pushing to cut IRS enforcement funding as part of a deal to raise the debt ceiling, when doing so will actually add to the national debt, according to Congressional Budget Office (CBO) estimates.

Republicans have railed against the additional $80 billion Democrats awarded to the IRS as part of the Inflation Reduction Act last year, and now they’re prioritizing its repeal over reducing the deficit.

In a memo sent to colleagues on Wednesday, House Budget Committee member Chip Roy (R-Texas) doubled down on the demand to take away the funds.

“Recouping these funds will not only save billions in inflationary spending right now, it also reduces the size of a weaponized agency and protects hardworking American families and businesses,” Roy wrote to fellow Republicans in the memo, which took issue with other Biden administration policies for being “deficit increasing.”

The CBO estimated last year that the increased funding for the IRS would result in $180.4 billion in additional revenue for the U.S. government over the next decade.

And new research suggests the additional IRS funding may be even more effective at reducing the national deficit than previously thought.

The cancellation of the IRS funding boost was also a condition for raising the debt ceiling, included in a GOP bill that passed the House earlier this month.

That bill nixes $45 billion for audits and $25 billion for operations, while preserving allotments of $3 billion for taxpayer services and $4.75 billion for a technology update.

The House-passed bill also cancels the funding for a formal study of an IRS-run online tax filing system, which the IRS has already completed and used to build a prototype that will be piloted during the 2024 tax filing system.

Tax experts say the $45 billion for enforcement will go the furthest toward reducing the national deficit, which now stands at $31.4 trillion. That’s about 120 percent of what the U.S. economy actually produces in a year, as measured by the ratio between debt and gross domestic product (GDP).

The government fails to collect around $600 billion in taxes it’s owed each year — an amount known as the “tax gap” that former IRS Commissioner Charles Rettig said could actually be as high as $1 trillion annually, if measured with greater accuracy.

One of the biggest chunks of that money, at roughly $130 billion, lies in uncollected personal business income, which is often made by companies classified as S-corporations, limited liability companies and partnerships.

Auditing entities like that, which can be bundled and nested within one another by lawyers to make them even more opaque to federal authorities, requires skilled accountants and data analysts, which the IRS is in the process of hiring. Salary requirements for these auditors are a big part of why Democrats say the agency needs all the extra money.

Debt-to-GDP has increased in three major phases since the last time the U.S. ran a surplus in the early 2000s — once after the dot-com recession, once after the global financial crisis of 2007 and 2008, and again after the coronavirus pandemic.

While federal spending has remained roughly around 20 percent of GDP for decades, it spiked to 25 percent in 2009 and above 30 percent during the height of the pandemic. It has since come back down below 25 percent as various pandemic-related support programs for the public have been dismantled and allowed to lapse.

Republicans, who passed massive tax cuts that contributed to the federal deficit during their past two presidential administrations, have not considered any revenue raisers while negotiating to increase the debt ceiling. On the contrary, Republicans are pursuing additional extensions of those tax cuts that could add a further $3.45 trillion to the deficit over the next decade.

Instead, Republicans have insisted solely on spending cuts in the current showdown.

“The problem is, we’re spending more than almost any time in modern history. So it’s a spending problem,” House Speaker Kevin McCarthy (R-Calif.) said Monday night. “You owe more money on the credit card than you make in an entire year. Because that’s what we have as Americans. We owe more than our entire economy is [worth].”

Cuts outlined in the Republican debt bill range from taking back unclaimed coronavirus relief money in a swath of pandemic-era spending packages to nixing tax credits and subsidies for environmentally friendly technologies advanced in a number of Biden administration policies.

Programs to increase renewable energy are a particular point of consternation for Republicans, who roundly fail to acknowledge the rapidly deteriorating conditions of Earth’s climate and environment that are associated with global warming and industrial production.

“Democrats’ latest green subsidy scheme will cost more than promised. Not only will their tax dollars go towards billion-dollar corporations, they will also flow to Chinese entities of concern and put American workers at a disadvantage,” Ways and Means Committee Chairman Rep. Jason Smith (R-Mo.) wrote in a one-pager released along with the GOP bill.

But the broader focus on limiting spending runs deep in Republican thinking.

When Medicare Part D legislation passed in November 2003 — during the George W. Bush administration — without a dedicated payroll tax, former Treasury official Bruce Bartlett said he was mortified.

“At the time, I thought that the reason Republicans — and I was a Republican in those days — were put on this Earth, was to control entitlement programs. And I was appalled that an entirely new entitlement program was created that was completely unfunded. It raised the deficit forever by about 1 percent of GDP,” Bartlett testified to the Senate Budget Committee earlier this month.

Republican ire toward the IRS runs just as deep these days. The first measure passed by the newly elected Republican-led House in January also terminated the Democrats’ $80 billion IRS funding boost, targeting the exact provisions as those canceled by the GOP debt limit bill.

“[The IRS] should be focused on providing quality service to taxpayers. Rescinding the funding for 87,000 new IRS agents is a great first step in that direction, and I was happy to vote ‘yes’ on this legislation!” Rep. Doug Lamborn (R-Colo.) said in January.

But the additional IRS funding and more focus on enforcement could lower the deficit more than previously thought.

Researchers with the IRS and Yale School of Management recently found the “behavioral response” of taxpayers toward greater levels of enforcement and the threat of future enforcement could bring in three times as much money as the CBO currently estimates and up to $1 trillion annually.

“The lack of any real enforcement presence for large groups of business entities impacts not only direct tax revenue collected but also taxpayer behavior and taxpayer morale in meaningful ways. In essence, not having a tax cop on the beat engenders more malfeasance in a way that the agency must address to prevent further erosion of tax compliance,” the authors wrote in a paper published earlier this month.

“Lack of an enforcement presence can also spur activity into segments of the economy because the limited enforcement presence gives an economic advantage to certain sectors or business forms that facilitate tax evasion, and it can place compliant taxpayers at a competitive disadvantage,” they continued.

Different parts of the economy are compliant with tax laws to different degrees. Workers and employees are the most law-abiding segment, reporting their wages and salaries with 99 percent accuracy, while business owners are far less tax law-abiding.

Among the least compliant sectors are farmers, whose income is subject to “little or no information reporting,” according to the IRS. Sixty-four percent of all farm income is misreported to the IRS, while business owners in sectors other than agriculture report their income with only 43 percent accuracy.