Congress could tax IRS again after debt limit deal

The debt-limit agreement highlights an overlooked threat to the $80 billion Democrats pushed through last summer for the IRS: That it will become a congressional piggybank.

Nine-and-a-half months after the money was handed over to the agency, lawmakers are taking a quarter of it back, in order to stave off budget cuts to unrelated domestic programs.

Though that’s helped ease the debt hike through Congress, some call it a precedent that could endanger the administration’s ambitious plans for the IRS.

After all, lawmakers will continue to face demands for money, even after the debt fight passes, and the agency will still have nearly $60 billion in its coffers — most of which won’t be spent for years to come.

The administration itself is downplaying the impact of the impending $21.4 billion cut, saying the money Democrats gave the IRS last year was always intended to be slowly spooled out over the next decade. Now, instead of running dry in ten years, the administration says, the money will be exhausted in eight.

But, by that logic, lawmakers will surely ask why they can’t lop off another year or two or three off the back end, and use the savings for something else.

“Once you start down this path…” said Sen. Ben Cardin (D-Md.), a senior tax writer.

“It’s extremely disappointing.”

That is an altogether different threat than had been the focus in Washington before the debt fight. Attention had been focused on Republicans' promise to repeal the entire $80 billion, something they campaigned on in the run-up to the midterm elections but was never particularly likely, not with President Joe Biden in office and Democrats in charge of the Senate.

A less stark but more potent risk is that the IRS money gets pulled into unrelated budget disputes, and Democrats are forced by Republicans to choose between cutting funding for the agency and other initiatives they also support.

That’s essentially what’s happening with the debt deal between Biden and House Speaker Kevin McCarthy (R-Calif.), who have agreed to use $20 billion of the money to prevent cuts over the next two years to domestic programs whose budgets are set each year by Congress.

The plan would actually increase the deficit by $19 billion, according to a Congressional Budget Office estimate provided to Senate Budget Committee Chair Sheldon Whitehouse (D-R.I.). Cutting IRS enforcement costs the government money because auditors bring in far more revenue than it costs to employ them. While the plan would save $21.4 billion in spending, CBO predicts it would reduce future tax collections by $40.4 billion.

Nearly six times the agency’s annual budget, the $80 billion was intended to be used for a once-in-a-generation overhaul of the agency that would improve tax services, beef up enforcement and modernize its technology.

The problem for the agency is that will be a very slow process. Though the money was approved last August, the IRS has barely begun to spend the cash.

It only released its blueprint for the cash in April and has told lawmakers it anticipates spending only $2.8 billion by the end of 2023. By 2025, just $5.8 billion will have been obligated, the IRS says. Most of the cash won’t go out the door until sometime after 2027.

That’s partly because it takes a long time to hire and train sophisticated auditors, something that will be particularly tough in a tight labor market.

So the money will be just sitting there, vulnerable to being repurposed by cash-hungry lawmakers.

“You can readily see the risk, which is that the next time anyone needs money, they’ll say, 'Well, there’s $60 billion there,'” said former IRS Commissioner Charles Rossotti.

The agency has resisted detailing its long-term plans for the cash in part because it hopes to retain some flexibility in deciding how to proceed.

But some predict the debt deal, and the risk of lawmakers coming back for more, will push the agency to further spell out its plans for the money in order to make clearer what is at stake.

“They’re going to have to show on the merits why the money is needed at that particular time,” said one former longtime tax aide, who was granted anonymity because he wasn’t authorized to speak publicly. “They need to show in granular detail, ‘This is what it means in terms of audits and collections.’”

For their part, Republicans are cheering the debt-limit cuts and say they’re hardly done trying to claw back the IRS money.

“Are you kidding?” said Senate Minority Whip John Thune (R-S.D.).

Sen. John Cornyn (R-Texas), another tax writer, added: “It’s a step right in the direction” but “we’ve got more to do.”

House Republicans are planning to roll out a new package of tax cuts soon, mostly focused on undoing recent reductions in business breaks for capital, interest and research expenses, which will refocus attention on the deficit.

At the same time, the debt agreement should bring some peace to Congress’s budget wars. Lawmakers won’t have to deal again with the borrowing cap until after next year’s presidential election, and their legislation includes an agreement on how much to spend on annual appropriations for the next two years.

Plus, Democrats will oppose any additional raids on the IRS money, said Sen. Chris Van Hollen (D-Md.).

“When you’re putting together your long-range plan, you need to know what resources will be available,” he said. “We will fight any effort to further erode this money.”

He added: “The good news is there’s still $60 billion there.”