Debt ceiling tax drop

Tax notices Contributing editors Robert Golder and Joseph J. Thorndike discuss the impending debt ceiling crisis and its likely impact on the IRS budget, all in five minutes.

This transcript has been edited for length and clarity.

Robert Goulder: You’ve heard the news by now: the federal government’s debt ceiling is just weeks away. If the alarm bells aren’t going off by now, they should be. Lawmakers could raise the debt ceiling voluntarily, as they did three times under the previous administration, but no one expects that to happen here without some concessions.

I’m with Bob Golder Tax notices. Today we ask what the political crisis means for the IRS. Is it possible that President Joe Biden will sacrifice IRS funding to avoid a bigger economic crisis? My colleague, Joe Thorndike, is a contributing editor Tax noticesbelieves that there is a real possibility that this will happen.

So tell me, Joe, is Armageddon too strong a word here?

Joseph J. Thorndike: Yeah, okay, maybe a little too strong. So here we go: complete unmitigated financial disaster. What we are doing now is negotiations.

I think the White House is still insisting that they are not negotiating the debt limit because President Biden refuses to negotiate on that issue. He says he wants to raise the cap not without conditions, but he’s willing to talk about seemingly unrelated issues like the amount of federal spending going forward, and perhaps IRS funding in particular, because it’s a top GOP priority.

Robert Goulder: So Republicans have strong opinions about IRS funding. How shocking!

Joseph J. Thorndike: Yes. Well, they really do. Last month, the House passed the Limit, Savings and Growth Act of 2023, which is basically the GOP’s wish list — or we could call it a demand list — for GOP approval to raise the debt limit.

In exchange for increasing the debt by $1.5 trillion, the bill would cut federal spending by $4.8 trillion over the next 10 years, and that includes $71 billion in cuts planned for the IRS.

Robert Goulder: Ah, now hold on, Joe. As I recall, this IRS forfeiture provision is actually rated as revenue defeat. That is, you take away their budgetary resources and the public debt actually increases. how is it

Joseph J. Thorndike: Yes true. Cutting the IRS budget in the name of deficit reduction is actually stupid because it doesn’t actually save money. When we cut the IRS budget, we cut the agency’s ability to collect taxes from people who already owe them money.

That means the $71 billion we’ll save in IRS funding will actually cost us — according to official estimates — about $180 billion in lost revenue. So what is the network about this? We lose about $110 billion over 10 years. It was math that got us $31 trillion in debt.

Robert Goulder: Yes. The So that answers the question. But then what’s the point of doing it if it’s not about debt reduction?

Joseph J. Thorndike: So the charitable answer to that, and taking Republicans at their word, is that it’s about reining in a poorly run agency. And the IRS has some long-term management problems, particularly around its information systems and technical modernization efforts. Recently, it has had serious customer service issues, and we’ve all heard about its falling audit scores. But these problems are mainly the result of inadequate funding.

Further cuts to the agency’s resources will only make these problems worse. The real reason I think the IRS is going on the chin now is that they are an easy target. They are the least popular agency in almost every survey. And attacking them is an easy political victory, but also short-sighted. It hurts everyone who ever has to deal with the IRS, and that’s pretty much everyone who pays taxes.

Robert Goulder: How do you think it will be resolved? Any predictions?

Joseph J. Thorndike: I think there’s a decent chance that the Biden administration will decide to sacrifice the IRS for the sake of a deal, either now on the debt limit or on the budget at the end of the year.

The reason is that when they are forced to sacrifice something, I think Biden might look at the same polls that are driving the GOP to attack the IRS. It’s not a popular agency, so if you have to screw up someone’s budget, then the IRS budget might be the least bad choice, at least politically.

Robert Goulder: there you have it. This is our take on the debt ceiling crisis and IRS funding. Thanks for watching.