Democrats and Republicans are already going to war over the budget for 2012. But there’s one big thing that both parties already agree on: cutting funding for the IRS.
House Democrats, in particular, have denounced the bipartisan proposals for a funding cut, saying it would hamper the IRS’s ability to close the “tax gap” — the estimated 16 percent of revenue that the government loses because Americans fail to pay their taxes in full. “The IRS estimates that this cut will end up costing $4 billion per year due to the lack of enforcement on tax cheats,” Rep. Norm Dicks said of the House proposal. “This cut literally increases the deficit.”
The National Treasury Employees Union, which represents federal workers, warns that the cuts would result in layoffs of 3,000 to 4,000 IRS employees, increasing the burden on an agency that’s already short-staffed. A 2011 report by the Treasury Inspector General concluded that hiring of new revenue officers hasn’t kept pace with attrition, even as the number of tax returns continues to rise and the tax code itself has grown more complex. As a result, the percentage of delinquent tax accounts that have been resolved “has steadily decreased,” the Treasury IG concludes.
Ultimately, the lost potential revenue could end up outstripping the upfront savings from IRS budget cuts. The agency’s “general rule of thumb is every additional dollar spent on enforcement brings $4 to $5 dollars of additional revenue . . . and there generally has been a reasonable return on enforcement dollars,” says Eric Toder, co-director of the Urban Institute-Brookings Tax Policy Center. “I don’t think, at the end of the day, this really saves the government any money.”
Republican defenders of the cuts say that the IRS has done a poor job of overseeing the use of energy tax credits, pointing to testimony from the Treasury IG that the agency could do more to prevent waste and fraud in that arena. Senate Democrats, on the other hand, say they were forced by budgetary constraints to make the cutbacks, even while acknowledging that the cuts could actually cost taxpayers more money down the road. They explain that there was a limited pool of money that could go to financial services and that they had to prioritize funding increases for the Securities and Exchange Commission and the Commodity Futures Trading Commission over the IRS.
Sen. Dick Durbin, who oversaw that process, seems especially chastened. “They are the biggest part of our bill, and they took a big hit. There’s no way around it,” Durbin said last month. “It’s penny-wise and pound-foolish because giving them the resources leads to collections that more than pays for those resources.”
The House and Senate will still have to resolve the differences between the two chambers’ IRS budget proposals. But given the bipartisan consensus that’s already formed on the cuts, it now seems to be a question of how much will be cut, not whether they will happen.
Update: A Senate Democrat who works on appropriations issues further explains the party’s thinking on the IRS cuts: “They are right –they took a sizable hit...With less money to allocate, cuts had to be made and because of its size, IRS – which represents about 54% of the subcommittee’s discretionary funding - took a big hit. They’ll still be taking in revenue, but it is counterproductive, unfortunate and something everyone hopes can be fixed...The point is it’s about choices and everyone making do with less.”