Thursday, May 23, 2013

Subsituting Non-IRS for IRS Governance of Federal Activities

-- Posted by Neil H. Buchanan

My new Verdict column today takes a different angle on the non-scandal-scandal involving the IRS.  I address the ubiquity of "tax expenditures," which are the "tax cuts" that Congress (on a VERY bipartisan basis) loves to pass, but which are the equivalent of direct spending by the federal government (mortgage interest deductions, research and development tax credits, child tax credits, excludibility of employer-provided health insurance, and on and on and on and on).  Both methods of subsidizing favored activities have the same impact on deficits and debt, but Congress (especially, of course, Republicans in Congress) loves tax expenditures and hates government spending.

I have always been a bit of an outlier among tax scholars in my attitude about tax expenditures.  The standard view, which has a great deal to be said for it, is that Congress should stop mislabeling spending as tax reductions, essentially because it is better for Congress not to be dishonest.  A slightly more nuanced argument might be that forcing Republicans to run their favored versions of social engineering through direct expenditures would force them to admit that not all spending is bad, which could pry open some room in the debate for other, more progressive spending programs.

My mild apostasy on this topic is based essentially on the simple difference between substance and form.  I frankly do not care what we call these programs.  Even though in many cases calling them "spending programs" feels more accurate, I just don't care.  If the issue is truth-in-labeling, then what really matters is that everyone is able to understand the label.  And by this point, I hardly think it is a surprise to anyone who matters to learn that people opportunistically label things, and the buyer should definitely beware.

A more potent objection to using tax expenditures rather than direct spending is that Congress's procedures differ radically with regard to things that are labeled "spending" compare to things that are labeled "tax breaks."  Spending generally needs to be re-authorized and re-appropriated every year, whereas tax provisions continue to live (generally without being reviewed for cost-effectiveness) in perpetuity.  The latter claim need not be true, of course, as demonstrated by the many tax provisions that are enacted on a temporary basis (e.g., the payroll tax holiday).  Even so, it is true that some tax expenditures suck up money without any meaningful, continuing oversight.

Of course, we could change all of that.  We could sunset all tax provisions, annually or otherwise, if we thought that doing so was a good idea.  For that matter, we could admit that many non-entitlement spending provisions are all but permanent already (military hardware being the most obvious example).

Still, even though it is simple enough to describe a change in the legislative process, Congress is (to put it mildly) rather slow to changes its procedures.  (Filibuster reform, anyone?)  Maybe it would be easier to force Congress to relabel tax expenditures affirmatively as spending than it would be to force it to bring tax breaks up for regular review.  I remain skeptical, but I see the possibility.

In today's Verdict column, I link to a related column that I wrote for FindLaw's Writ (the defunct predecessor to Justia's Verdict) in March 2010.  There, I made the argument that there is another serious real-world cost involved in relabeling tax expenditures as direct spending.  As it stands, because Congress uses the Internal Revenue Code as its preferred legislative vehicle, the IRS ends up with enforcement responsibilities for a surprisingly large amount of the federal government's activities.

Moving enforcement responsibilities out of the IRS is, however, hardly a costless prospect.  As I noted in my 2010 column, other federal agencies can (and often do) simply end up requesting that IRS employees be "tasked" to the non-IRS agency, making such a change merely an exercise in re-labeling.  Moreover, there is a lot of expertise and institutional knowledge built into work environments.  (Indeed, part of what we are learning about the current non-scandal-scandal is that the Exempt Organizations group was, through budget cuts and low morale, essentially stripped of its institutional memory, as its best and most experienced people moved on.)

Today's Verdict column expands on the costs of moving from IRS governance of various activities to non-IRS governance.   I continue to believe that the best approach, taking account of all of the tradeoffs involved, would be simply to stop fighting about relabeling tax expenditures, but being careful to give the IRS the resources necessary to perform its outsized tasks.

As we now know, however, that is not going to happen.  Even though nothing damning is coming out of all the furor over the non-scandal-scandal, the Republicans are simply having too much fun with this.  Among other things, their insistent innumeracy is coming to the fore, as conspiracy theorists start to point to anecdotes as proof that the IRS is on the loose.  The funniest version of that so far was a column by former Bush I speechwriter Peggy Noonan, who wrote about four conservatives who say that they have recently been audited by the IRS.  Get it?  Conservatives were audited by the IRS.  That's the REAL scandal!  Statistics maven Nate Silver had fun with that one on his blog, actually running through the numbers to show what any adult should already know: Four examples do not prove Noonan's point.

No matter.  As my first post on this subject last week suggested (and as some examples in my Verdict column today demonstrate), the Republicans are getting too much political benefit from this to let it go.  A party that could never quite get itself to denounce birther-ism is certainly not going to go quietly on "political targeting of conservatives" (even though the targeting was not of the conservatism but rather the politicking).

Which raises a further question.  If, as I now believe, the politics have changed sufficiently to make it impossible to return to the status quo ante, with the IRS performing the governance duties that Congress dumped upon it -- and doing so rather well -- is there any prospect at all that the non-IRS agencies will be allowed to do their new jobs well?  After all, even though we know that Republicans hate the IRS, do they not generally hate all government workers?  And if so, is it not possible that we will soon see functions shifted out of the IRS, at great cost and dislocation, only to be dumped upon furloughed and salary-frozen employees in other federal agencies, with no gain to be had by pasting "not the IRS" on the agencies' appropriations requests?

This seems quite possible to me.  Other than people who turn out to be directly important to wealthy people and Republican Congressmen (air-traffic controllers being the obvious recent example), being a government employee means being hated by movement conservatives.  Moving functions around to non-IRS agencies might end up solving nothing, and costing money and causing serious mistakes in the process.  At this point, however, we are left hoping that there is some daylight between Republicans' hatred of IRS employees and their hatred of every other civil servant.

We have always had an impoverished public sector in the U.S.  (There is a reason that waiting rooms in government agencies are generally so dreary, after all.)  That is now likely to become even worse.  Nevertheless, there might be no choice now but to fight for the second best.  The IRS has been given a series of nearly impossible tasks, and it has outperformed expectations over and over again.  From here onward, however, it will probably not even be allowed to try.  We had better hope that there are other federal agencies that will be given a fair chance to succeed.


  1. How does IRS track organizations formed as 501(c)(4) organizations that do not file applications for approval or do not file required annual returns? I assume that an organization so formed applies for a TIN. Some meaningful stats might better address the issues involved.

    And assuming such an organization does file and get approval of an application, does the information called for in annual returns provide enough information to determine whether it is in compliance with 501(c)(4)? Might such an organization play the audit lottery game, figuring that IRS may lack funding for detailed audits?

  2. Answer to the last question: Yes, especially now!

  3. Is it possible that following Citizens United and the flood of GOP leaning 501(c)(4) organizations formed in response had a coordinated - or at least conscious parallelism - effort to flood the IRS with applications for approvals well-knowing or anticipating that the IRS might, with its budgetary limitations, respond irresponsibly?

  4. Today's NYTimes (5/27/13) Nicholas Convessore and Michael Luo article "Groups Targeted by I.R.S. Tested Rules on Politics" addresses, in a limited way, some of my questions.

  5. The Confessore/Luo article was interesting, to be sure.

    I'm willing to believe almost anything of today's GOP, but even I have to say that I find it hard to imagine that there was any consciousness about flooding the IRS on this issue. For one thing, the underlying issue is so opaque and boring (who gets to be a nonprofit but doesn't have to reveal donors) that it wouldn't be obvious ex ante that this could be spun as a scandal. I think it fell in their lap, and to their delight, the press fell for the scandal trope.

    Even now, it's not at all clear that the non-scandal-scandal actually has any traction with non-Tea Party voters. Maybe it will energize Tea Partiers, but they've been flooring it for the last four years, anyway. Nobody else seems to care, and there's already some evidence of normal voters viewing this as yet another example of Republican overreach.

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