IRS Chief Warns Budget Cuts Would Raise the Deficit

IRS Chief Warns Budget Cuts Would Raise the Deficit

IRS Commissioner Danny Werfel
CNP/INSTARimages
By Yuval Rosenberg and Michael Rainey
Thursday, February 15, 2024

Happy Thursday! We’re one day closer to a holiday weekend — unless you’re in Congress, in which case the weekend break has already started.

Here’s the latest.

IRS Chief Warns Budget Cuts Would Raise the Deficit, Harm Service

IRS Commissioner Danny Werfel cautioned lawmakers Thursday against cutting his agency’s budget, warning that it would both raise the deficit and undermine service improvements.

“For every $100 million taken from the IRS., the deficit grows by $600 million over 10 years,” Werfel said at an oversight hearing of the House Ways and Means Committee.

Republicans have been trying, at times successfully, to pare back an $80 billion infusion of additional funding over 10 years given to the tax agency as part of Democrats’ 2022 Inflation Reduction Act. President Joe Biden agreed to claw back $20 billion of that funding as part of a deal with House Republicans last year to raise the debt limit.

Werfel told lawmakers that the 2024 filing season, which opened on January 29, is going smoothly so far and said that the government’s investments in the IRS allow the agency to improve its operations and taxpayer service. But he argued that maintaining the additional funding for the agency was vital for continued improvements. “Our base budget is insufficient to run the daily train schedules,” Werfel said. “What that means is that we have to borrow from the modernization funding just to keep the lights on. And if we keep doing that, we won’t modernize.”

Only 4.5% of the original $80 billion funding boost provided for the IRS under the 2022 Inflation Reduction Act has been spent so far, according to a new report from the Government Accountability Office cited by The Hill. And as The Hill’s Tobias Burns notes, the Treasury Department this month raised its projections of how much revenue would be gained as a result of the IRS funding injection.

“The IRA as enacted would increase revenue by as much as $561 billion over 2024 – 2034, substantially more than earlier estimates,” the Treasury wrote. “If the IRA funding is renewed when it runs out, as the administration has proposed, estimated revenues would be as much as $851 billion.”

Republican Ways and Means Chair Jason Smith of Missouri criticized what he called “fantasyland claims” about how much revenue the agency may generate through ramped-up audits of the wealthy. And he questioned the agency’s decision to once again delay implementation of a 2021 law requiring payment apps and online marketplaces to report payments totaling more than $600 on a 1099-K form — a change that Republicans oppose. “The way to fix this terrible law is to repeal it, not to shield the Biden administration from the consequences of its own policies,” Smith said.

Werfel defended the agency’s decision on the $600 threshold, saying the agency was trying to protect taxpayers from being “overly burdened” or paying more than necessary. The agency has delayed the requirement for two straight years, leaving in place a prior $20,000 threshold, which will be dropped to $5,000 next year and then $600 the following year.

“In this situation, we delayed imposing the lower threshold because we realized that immediate implementation posed a high risk of taxpayers being confused, and given the complexities of the 1099 reporting, some potentially paying taxes they didn’t actually owe,” Werfel said. “That is something we take very seriously and will do everything in our power to avoid.”

Werfel also said that if Congress passes a bipartisan deal to expand the Child Tax Credit and revive some expired business tax breaks — a deal that the House approved last month and is now awaiting action in the Senate — the IRS could potentially implement that law within six to 12 weeks, depending on the details of the legislation.

CBO Director Warns of Rising Interest Costs, Points to a Fiscal Benefit of Immigration

In an appearance before the House Budget Committee Wednesday, Congressional Budget Office Director Phillip Swagel walked lawmakers through the CBO’s most recent 10-year outlook, which includes a major increase in interest spending in the coming years.

As deficits and debt grow over the next decade, CBO estimates that outlays on net interest will exceed spending on both the defense and non-defense portions of the discretionary budget by 2034, which could be a problem for all kinds of government programs, as well as for the broader economy.

“Rising interest costs will crowd out other possible uses of government resources, and then also pose a risk to our economic stability,” Swagel said.

On a more positive note, Swagel noted that deficits are estimated to be smaller than they were previously, thanks in part to the deficit reduction included in the bipartisan Fiscal Responsibility Act of 2023.

A surge in immigration is also helping to improve the fiscal outlook. CBO now estimates that the economy will be $7 trillion larger in 2034 due to a larger workforce, most of which is driven by immigration. That translates into $1 trillion a year in additional tax revenue.

Swagel highlighted those benefits during his testimony. “A key finding in our report is the role of immigration in the economy,” he said. “Immigration would add to our economy, our labor force would be higher, that means our income will be higher, our output would be higher and that in turn would generate additional tax revenue.”

Quote of the Day

“Every argument against this is wrong. Every single one of them.”

− Senate Republican Leader Mitch McConnell, in an interview with CNN, pushing back against those in his party who oppose providing more aid to Ukraine.

McConnell said that the opposition is being driven by former president Donald Trump, the frontrunner in the GOP’s 2024 presidential primary. But he argued that the isolationist resistance to helping Ukraine is misguided: “Most of the money’s being spent here. Europeans have done as much, and, after the $55 billion from the EU, more than we have. Not a single American soldier has lost their lives in this fight – we’ve got a bunch of people willing to kill Russians. I can’t find any argument against this that makes any sense.”

McConnell suggested that the House should hold a vote on the Senate-passed foreign aid bill that includes more than $60 billion for Ukraine, a package that House Speaker Mike Johnson has dismissed.

“Whatever advice I have for the speaker I give him privately, not publicly,” McConnell told CNN. “The only thing I’ve said publicly is we’ve heard all kinds of rumors about what the vote would be on Ukraine. Why not have it?”

Number of the Day: 13

House lawmakers ended their week early this afternoon to start a 13-day recess. The White House slammed Speaker Mike Johnson for letting his members head out without passing aid to Ukraine, with a spokesman saying that Johnson is “cutting and running, sending the House on an early, undeserved vacation as he continues to strengthen Russia’s murderous war effort and the Iranian regime at the expense of American national security, U.S. manufacturing jobs, and our closest alliances.”

Lawmakers are scheduled to return on February 28 — just a couple of days before a March 1 deadline to avoid a partial government shutdown and a second deadline for the rest of the government one week later.

“Given Johnson‘s three-seat majority, conservatives have the power to successfully obstruct any spending deal that comes before the House Rules Committee,” Politico’s Caitlin Emma and Jennifer Scholtes report. “So Republicans are expecting they will have to rely on Democratic votes in taking up a final funding plan using a procedural gambit that requires a two-thirds majority of the House, a procedural maneuver that Johnson has used several times to sidestep his fractious right flank.”

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