Tax Notes logo

Debt Limit Crisis Might Go Badly for the IRS

Posted on May 4, 2023

With Armageddon slated to arrive on or about the first of next month, it seems like a good time to get started with those debt limit negotiations. President Biden, of course, says he won’t bargain over raising the ceiling; only a “clean” increase will do.

But the president has also invited House Speaker Kevin McCarthy, R-Calif., to join him at the White House for some serious talk about the looming crisis. So be sure you keep things straight — those talks that Biden wants to begin? Definitely not a negotiation. Let’s just call them discussions aimed at reaching an agreement. That will make a world of difference.

As Biden begins not-negotiating with McCarthy, he will almost certainly be forced to consider items on the GOP’s current wish list, otherwise known as the Limit, Save, Grow Act of 2023 (H.R. 2811). Passed in the House by the narrowest of margins last week, the bill promises to deliver $4.8 trillion in deficit reduction over 10 years, most of it from new caps on federal spending and the repeal of various energy tax credits.

Another feature of the Limit, Save, Grow Act would slash IRS funding. The bill claws back most of the $80 billion allotted to the agency by the Inflation Reduction Act of 2022 (P.L. 117-169). Repealing that funding has been a top Republican priority since the moment it was enacted.

But it’s self-defeating to defund the IRS when crafting legislation to shrink the federal deficit. The House majority voted to take back $71 billion from the agency — money the IRS was planning to spend on tougher enforcement, enhanced customer service, and other projects. But according to the Congressional Budget Office, the funding cuts will impair the agency’s ability to collect taxes. The result: a revenue loss of $180 billion over the next 10 years.

That’s some next-level brilliance at work: Take back $71 billion in already-promised IRS funding so you can lose $180 billion in federal tax collections.

That’s exactly the sort of math that produces a national debt of $31 trillion.

The IRS funding cuts are just an exercise in political grandstanding. GOP leaders know that the IRS is an easy target, and they’re making the most of the agency’s vulnerability. But anyone paying attention also knows the IRS needs this money.

Over the years, the IRS has been chronically understaffed and underfunded. It’s also been frequently, if episodically, mismanaged. But you can’t solve the last problem by exacerbating the other two, and you can’t solve the management issues by simply berating the IRS commissioner from the dais in a hearing room or tossing off one-liners (even good ones) on tax day.

Still, IRS budget cuts are likely to remain a top GOP priority. I’m not sure why the tax policy community doesn’t seem to take this threat more seriously; perhaps it believes Biden when he says he won’t negotiate over a debt limit increase. If so, that distinguishes those in the community from me.

I suspect Biden will negotiate, doubling down on his notional distinction between budget negotiations and debt limit negotiations to create room for some sort of vital dialogue.

And here’s the thing: When forced to contemplate a range of unpleasant compromises as part of those non-negotiations over the debt limit, which compromise will strike Biden as the most tolerable? Giving up the green energy credits that so many taxpayers and businesses appreciate (and which have turned out to be far bigger and more transformative than anyone initially realized)?

Or walking back the additional funding for America’s most unloved federal agency, the IRS?

Anyone who thinks the IRS really needs that money should be worried.

Copy RID