Understanding the Implications of the Biden-McCarthy Debt Limit Deal on IRS Funding

Introduction: In a recent Twitter thread, Catherine Rampell (@crampell) shed light on the implications of the Biden-McCarthy debt limit deal on IRS funding. The deal involves a rescission of approximately $20 billion out of the $80 billion that had previously been allocated to them as part of the Inflation Reduction Act. This cut in funding has raised questions and uncertainties. In this blog post, we will dive deeper into the details discussed by Rampell and explore the potential impact of this deal on the IRS’s operations and long-term plans.

Flexible Funding for Long-Term Investments: One of the primary objectives behind the structure of this funding was to provide the IRS with a reliable and substantial funding source. Historically, the agency faced challenges due to wild swings in annual funding, making it difficult to plan and execute longer-term investments, such as IT overhauls. The large funding allocation aimed to provide flexibility and stability to the IRS for better long-term planning.

Rescission of Funding and Offsets: As part of the debt limit deal (which we remind you has not been voted on at the time of this writing), approximately $20 billion is being rescinded from the allocated budget. While this may seem significant (25% of the total amount), it’s important to understand this from an accounting perspective. The rescissions are officially counted as $10 billion coming out of FY24 and $10 billion from FY25. In each of these years, the rescissions are being used as offsets against other discretionary spending priorities, effectively freeing up $10 billion from the IRS’s budget in each year.

Timing and Flexibility: However, it’s essential to note that these “savings” on paper do not necessarily mean that the IRS will immediately lose access to those funds. The agency still has access to its remaining approved balance of approximately $60 billion ($80 billion minus $20 billion) that can be utilized as needed. The timing of the spending of those previously allocated dollars remains flexible, allowing the IRS to continue with planned upgrades, hires, and other investments, as long as the aggregate spending stays below $60 billion in the near term. Because of this “shell game” in the timing of when funds can be accessed, we might not notice the “defunding” for a long time, if ever at all.

Impact on IRS Funding and Future Plans: While the IRS funding cuts are being counted as deficit reduction measures, it’s crucial to understand that the agency will receive less money in aggregate compared to what was originally allocated. This reduction in funding may affect the IRS’s ability to execute long-term plans effectively. Future administrations and the IRS itself may need to fight for additional funding in the coming years to finish implementing ongoing initiatives and address any potential gaps in resources.

Uncertainties and Future Adjustments: Restoring additional funding, whether it be the $20 billion or any other amount, will largely depend on future Congresses and the prevailing political landscape. It is worth highlighting that cutting funding for the IRS is generally considered a poor fiscal strategy, as the agency’s activities have shown a positive return on investment, bringing in several dollars for every dollar spent, according to the Congressional Budget Office (CBO) and other sources.

Conclusion: The recent Biden-McCarthy debt limit deal and the rescission of IRS funding have raised concerns about the agency’s ability to plan and execute long-term investments. While the cuts are scored as expanding deficits, the actual impact on tax revenue collection will depend on the actions of future Congresses and adjustments made by the IRS in response to the current deal. It will be crucial to monitor the developments and any potential legislative adjustments to ensure the IRS’s efficient operation and its ability to fulfill its mandate effectively.

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