Democrats want to raise billions of dollars by giving the IRS more money to go after tax cheats — and use the money to pay for their infrastructure spending plans.
There’s one problem: That isn’t allowed under Congress’s arcane budget rules.
A two-decade-old rule bars lawmakers from paying for legislation with money generated from things like beefing up IRS audits of the rich.
It’s a crucial problem Democrats are now confronting behind closed doors.
They are relying on greater IRS enforcement to contribute billions toward the cost of their plans. If they can’t tap that, it could blow a big hole in their budget numbers.
Lawmakers are now discussing ways around the rules, with some pushing to overturn them.
“This is an issue we’re looking at closely,” said Senate Finance Chair Ron Wyden (D-Ore.). “The revenue generated from going after wealthy tax cheats should be counted toward the revenue needed to pay for critical investments in the American people.”
“Hundreds of billions of dollars are on the table, and revenue is revenue.”
Going after uncollected taxes is among the politically easiest money Democrats are likely to find when it comes to paying for their big-ticket spending packages.
While some lawmakers are skittish about raising taxes, few object to the idea of expanding IRS enforcement, especially after Commissioner Charles Rettig speculated last month that the annual tax gap — the difference between what’s owed and what’s actually collected — might run as much as $1 trillion annually.
If Democrats can’t use that money to pay for their plans, they may have to turn to more controversial alternatives, such as even more tax increases or adding to the deficit.
“I’ll note that budget scoring rules block Congress from using that high-return investment as a pay-for – that needs to change,” said Sen. Sheldon Whitehouse (D-R.I.), in a hearing last week on the tax gap.
Improving tax collections is also an area of potential bipartisan compromise as the two sides explore whether they might be able to work together on an infrastructure plan.
Republicans, sometimes blamed for exacerbating the tax gap with years of tight IRS budgets, now say they are open to helping the agency go after unpaid tax bills, though some are skeptical there's as much out there as Rettig says.
The quandary facing Democrats is reminiscent of one Republicans confronted when they were working on their 2017 tax cuts.
Back then, they wanted to use dynamic scoring — which takes into account the macroeconomic impact of tax changes — to help cover the cost of their plan. But they ran into what proved to be insurmountable procedural hurdles in the Senate and weren’t able to include it.
For Democrats, the problem is budget scorekeeping rule number 14.
It prevents lawmakers from incorporating into calculations of how much legislation costs any savings from increasing IRS audits or other “program integrity” initiatives across the government designed to make programs more cost-effective — such as cracking down on fraudulent Social Security disability payments.
“No increase in receipts or decrease in direct spending will be scored as a result of provisions of law that provide direct spending for administrative or program management activities,” the rule says.
That’s because government forecasters have long considered those savings too iffy to be relied upon.
“There are a couple degrees of uncertainly,” said Janet Holtzblatt, a former longtime tax expert at the Congressional Budget Office.
For one thing, agency budgets are set one year at a time and just because an administration says it will spend a certain amount of money on a department in the future doesn’t mean lawmakers will follow through.
Some are now proposing to make at least some IRS funding “mandatory” so that it is more reliable, but even with that there is an unanswerable question of whether Congress in the future might siphon away other department money that's discretionary.
What’s more, lawmakers don’t necessarily always know how an agency will spend money. If Congress doesn’t include specific instructions, it’s possible a department will use the cash in unforeseen ways that have nothing to do with what lawmakers wanted.
“One of the concerns from the perspective of the scorekeepers was that you were not going to give credit for very uncertain savings coming from a certain event” of deciding to boost funding,” said Holtzblatt, now a senior fellow at the Tax Policy Center.
Aside from the question of whether the money should count is the issue of how much would count if it did.
There’s general agreement that hiring more auditors generates savings to the government because they recover more in uncollected taxes than it costs to employ them.
But some doubt Rettig's $1 trillion tax-gap estimate, and experts disagree on how much the agency might recover.
It takes awhile to hire and train tax auditors, for example — they don’t immediately begin producing revenue for the government.
The Biden administration says its proposal to increase IRS funding as well as expanding income information reporting would generate $700 billion. Budget analysts at the University of Pennsylvania said earlier this month they expect the Biden proposal to generate $480 billion. Last year, CBO said increasing IRS funding by $40 billion over a decade alone would generate $63 billion in savings.
Democrats are still conferring over how to get around the budget restrictions, a top aide said, and there is a range of possibilities.
“There are discussions going on about how is the most appropriate way to make sure that these sorts of things do happen and that we get credit for them,” the aide said.
“Leadership, the Budget committee, the Finance committee, Ways and Means — all sorts of folks are thinking about this.”
There is no easy answer.
They could rewrite the rule. But it affects a number of government programs and any change is supposed to be done by consensus with CBO, the White House budget office and both congressional budget committees. Some see that as unlikely, partly because it would create an inconsistency in how different programs are treated.
Democrats could make the change unilaterally as part of their annual budget. But it’s unclear whether the Senate’s parliamentarian, Elizabeth MacDonough, will allow that, particularly if Democrats try to push their spending plans through using a so-called reconciliation measure, which tend to get extra scrutiny from the chamber’s rules referee.
“What does Elizabeth say? Does she let you count that?” said another Democratic aide.
A third option for Democrats would be to leave the current rules unchanged and simply declare that they believe their package is being underwritten by expanded IRS audits, even if that’s not what official estimates say.
That’s essentially what Republicans did when they were writing what became the Tax Cuts and Jobs Act.
They had hoped dynamic scoring would go a long way toward making the budget math behind their plan work — no small consideration when then-Sen. Bob Corker (R-Tenn.), in particular, wanted their package to be deficit neutral.
But Republicans were forced to abandon dynamic scoring, at least as part of official budget estimates, because of procedural problems in the Senate.
So they instead persuaded Corker to look past government forecasters’ estimate and presume the tax cuts would help the economy, and generate a lot of extra revenue in the process, so that the plan’s ultimate cost would be smaller than its official $1.5 trillion sticker price.
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