IRS funding, child tax credit will be top issues in 2023

Divided government is likely to make for a slower year on tax policy in 2023 as a GOP House that wants to go after the IRS runs into a Democratic administration and Senate that has very different ideas on taxes. 

After two years of tax policy being at the center of major legislative vehicles, the focus in the next year may turn to how the IRS uses $80 billion in new funding from the Inflation Reduction Act. 

The bulk of the IRS’s new funding will be distributed over the next decade and involve training thousands of new workers to perform more complicated audits. 

More quickly, funding will be used to hire additional staff to pick up the phone and answer questions for individuals and businesses as well as grind through a backlog of millions of tax returns. 

“The two places where I expect we’ll see immediate effects of the funding is getting the phone answered and the backlog of tax returns finally cleared, getting people their refunds. People should start to see these benefits early next year when tax season starts in February,” Howard Gleckman, an analyst with the Urban-Brookings Tax Policy Center, said in an interview.

“There’s going to be a lot of people who are really unhappy if they still can’t get their phone calls answered after Congress gave the IRS $80 billion,” Gleckman added.

Unprocessed tax returns in the IRS inbox have been a problem since the agency had to shut down facilities and scale back operations in 2020 due to the coronavirus pandemic. Over the past two years, the backlog has numbered in the tens of millions of returns and still stands at more than 6 million, according to the National Taxpayer Advocate’s (NTA) office, which is part of the IRS.

“Numerically the IRS is in about the same place that it was around the same time last year,” the NTA wrote in a status report in November, adding that the agency had “north of four million business returns awaiting initial processing” as of late October.

Lawmakers in both parties have said that taxpayer service at the IRS needs a big improvement. Even Republicans who railed against the funding boost said it was their top priority for how the money should be spent.

“The IRS should use its additional funding to prioritize clearing the backlog of returns and correspondence, and expediently pay taxpayers who are owed a refund,” Senate Republicans including Mike Crapo (Idaho) and John Thune (S.D.) told the IRS in a letter in September. “The IRS needs to answer its telephones and hold times should average five minutes or less. No taxpayer should ever experience a ‘courtesy disconnect’ from the IRS.”

A divided Congress means that big new tax bills, such as an effort by Republicans to make former President Trump’s tax cuts permanent, likely won’t get anywhere in 2023. 

Still, some smaller, more targeted tax proposals are on the table and could be a factor in next year’s debates.

The top priority for Democrats is a beefed-up child tax credit (CTC), which was expanded during the pandemic and dramatically improved child poverty rates before being allowed to lapse. 

Democrats have been pitching a deal on the CTC in exchange for credits favored by big business, including write-offs for research and development as well as interest payments. While there’s pressure on Democrats to get something done before they lose control of the House, advocates say the issue won’t be going away any time soon.

“They’ll be watching for this next year even with a divided government, and this could even be a litmus test in 2024,” Dorian Warren, co-chair of the progressive Economic Security Project, said in an interview during a rally for the CTC last week. “It’s not going to go away. Expectations have been raised.”

Another big piece of tax legislation now being debated by lawmakers that could also be pushed to next year is a major retirement package favored by Wall Street. A version of the bill sailed through the lower chamber in the spring with broad bipartisan support.

Sen. Ben Cardin (D-Md.) told reporters in November that the bill could be “worked out with one final meeting. And there would be broad consensus to pass it.”

“The question is whether it’s held off for other issues and we can’t move it because other issues don’t allow us to move it,” he said, referring to its potential place within a broader year-end spending package.

Proponents of that bill argue it will help low- and middle-income people save for retirement, while critics say it’s tailored to the interests of rich people with oversized retirement accounts serviced by the financial sector.

Experts say that additional tax measures that could find bipartisan support in 2023 could stem from a potential downturn in the economy if the Federal Reserve triggers a recession with interest rate increases. The Fed is expected to raise rates for a seventh straight time after its meeting this week.

“If we fall into a recession — and nobody knows if that’s going to happen or not — I could imagine Congress passing a bipartisan individual tax cut to get us through it. That’s conceivable,” the Tax Policy Center’s Howard Gleckman said.

“House Republicans are much more interested in investigations and message bills than they are in legislating. That’s not my opinion — they’ve said that. Senate Democrats are not likely to go along with what they do. Conversely, there’s legislation that Democrats would want to pass, but it won’t get through the House. Other than a possible anti-recession tax cut, there’s no new substantive tax legislation,” Gleckman added.

Republican resistance to the new $80 billion in IRS funding has turned into an appropriations fight over the agency’s baseline budget. More of that is expected in 2023.

“Scrutiny of agency allocations will be a priority of the Republican majority,” House appropriator and financial services subcommittee ranking member Steve Womack (R-Ark.) said in a statement to The Hill. “Adjustments will be necessary.”

With Republicans taking control of the tax-writing House Ways and Means Committee, oversight of the newly beefed up IRS budget is certain to get extra scrutiny in committee hearings over the course of 2023. The confirmation fight over President Biden’s nominee to helm the agency, Danny Werfel, will also be a battle.

“The appropriate funding level for the IRS will be an essential part of the discussion next year particularly as it relates to oversight and hearings that Republicans may set on Ways and Means,” Garrett Watson, a policy analyst with the Tax Foundation, said in an interview.