Business

Republicans win faster IRS cuts in funding deal

by Tobias Burns - 01/10/24 6:00 AM ET

A $1.66 trillion top-line spending agreement announced by congressional leaders this week will accelerate funding cuts to the Internal Revenue Service favored by Republicans.

The bipartisan deal would cut $10 billion from the IRS during fiscal 2024, one year earlier than Democrats and Republicans previously agreed on in a deal to raise the debt limit last summer. The debt limit deal included $20 billion in overall reductions to a controversial IRS funding boost.

The acceleration is the latest reduction in resources for the IRS, which was slated to receive $80 billion in funding through the 2022 Inflation Reduction Act.

The additional funding was intended to redesign the agency and reinvigorate U.S. tax collections with a focus on the richest taxpayers. But Republicans took immediate aim at the IRS funding increase, voting to repeal the entire allotment last year upon retaking the House and whittling away at it through successive funding deals.

“The concessions we achieved will include an additional $10 billion in cuts to the IRS mandatory funding (for a total of $20 billion), which was a key part of the Democrats’ ‘Inflation Reduction Act,’” Speaker Mike Johnson (R-La.) wrote in a Sunday letter to fellow legislators.

House Speaker Mike Johnson of La., speaks at a ceremony to award a Congressional Gold Medal to baseball player Larry Doby at the Capitol, Wednesday, Dec. 13, 2023, in Washington.(AP Photo/Mark Schiefelbein)

“While these final spending levels will not satisfy everyone, and they do not cut as much spending as many of us would like, this deal does provide us a path to … move the process forward [and] reprioritize funding within the topline towards conservative objectives,” Johnson wrote, potentially indicating further pressure on the IRS in the future.

Republicans are now front-loading IRS cuts and paving the way for additional drawdowns in subsequent years, especially if they win big in the 2024 elections.

The new timetable means that one-quarter of the $80 billion funding bump for the IRS over the next decade has been nixed entirely within fiscal 2024.

While experts say the remaining $60 billion is still more than enough for the IRS to push ahead with the main features of its renovation, the rapid pace of rescission suggests that additional cuts could force the IRS to alter course more substantially.

“This is a commitment. It’s actually going to happen,” Janet Holtzblatt, former head of tax policy studies in the tax analysis division of the Congressional Budget Office, told The Hill on Monday. “It does quietly open the door for more cuts down the road.”

“The cuts in the past have already been established. There is that room now to cut forward. [In no way] is it a good thing for the IRS,” she added.

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However, Democrats say the new timetable for IRS cuts won’t disturb the agency’s ongoing modernization and operational update.

“Thanks to this agreement preserving the same funding levels agreed to in the [Fiscal Responsibility Act], the IRS will still be able to maintain the critical investments we secured during the last congress,” a congressional Democratic aide said in a statement sent to reporters.

“By securing the $772.7 billion for non-defense discretionary funding, we can protect key domestic priorities,” Senate Majority Leader Chuck Schumer (D-N.Y.) and House Democratic Leader Hakeem Jeffries (D-N.Y.) said in a Sunday statement.

Democrats said the top-line deal paves the way for a more normal appropriations process for the rest of the year, as opposed to the chaotic negotiations that marked 2023 and took place at the risk of debt default and government shutdowns.

“Now the Appropriations Committees, led by Chair Patty Murray and Vice Chair Susan Collins in the Senate and Chairwoman Kay Granger and Ranking Member Rosa DeLauro in the House, can prepare full-year appropriations bills, free of poison pill policy changes,” Schumer and Jeffries said.

Tax experts told The Hill that the likely effect of the cuts would be hiring fewer auditors, which is the most difficult part of the IRS’s new enforcement push. Auditing big companies and wealthy individuals takes a high level of expertise, they said, and auditors can often make more money in the private sector.

House Minority Leader Hakeem Jeffries, D-N.Y., speaks during his weekly news conference on Capitol Hill, Thursday, Nov. 30, 2023, in Washington, (AP Photo/Mariam Zuhaib)

“This money did give the agency certainty with respect to hiring, because you just can’t bring in people one year and then say, ‘OK, we can’t have them the next’,” Holtzblatt said.

Taking away funds for tax collections will add to the national deficit, which has risen to higher, historic levels following the pandemic and is a sore spot for Republicans.

Total public debt rose to 120 percent of gross domestic product (GDP) in the third quarter of 2023 after spiking above 130 percent in the immediate aftermath of the pandemic. In the eight years before the pandemic, national debt stayed at roughly the same level as GDP.

The Congressional Budget Office estimated that the initial $80 billion funding bump for the IRS over the subsequent decade would result in $200 billion in additional revenue, for a net deficit reduction of around $120 billion, or around $12 billion a year.

That’s just 1.7 percent of the annual tax gap, which is the amount of money owed to the government each year but isn’t collected. Projected estimates of the tax gap updated in October put that number at $688 billion in tax year 2021.

Most of that comes from people and companies underreporting what they owe. Underreported taxes totaled $542 billion in tax year 2021 from an average $445 billion in tax years 2017-2019.

Advocacy organizations that support federal economic programming as well as budget hawks with an eye on the national deficit are united in their disapproval of the shrinking IRS budget.

“Republicans profess concern about budget deficits. However, slashing IRS funding will only worsen the deficit by letting wealthy tax cheats off the hook. And there’s every reason for Democrats to expect that if they agree to Republicans’ blackmail over the IRS now that Republicans will demand further leniency for billionaires next year,” Adam Ruben, director of the Economic Security Project Action, said.

“Rather than passing legislation to expand the tax gap, Congress should be focused on efforts to further improve tax compliance,” the Committee for a Responsible Federal Budget, a Washington think tank, said in an October statement on IRS funding rescissions. “Such efforts have a long history of bipartisan support as they offer a way to raise revenue without increasing taxes.”

The IRS declined to answer questions from The Hill about the accelerated budget cuts and their effect on operations and planning at the agency.