WASHINGTON – A plan by Democrats to fund infrastructure investments by beefing up the Internal Revenue Service to catch tax cheats has resurfaced long-standing resentments for Republicans, whose mistrust of the agency has been simmering for years , erasing hopes of a bipartisan legislative deal based on narrowing the so-called tax gap.
Republican senators this week withdrew from a provision to tighten tax enforcement at the IRS, crowding out a crucial source of funding for an infrastructure package that would spend roughly $ 600 billion on roads, bridges, broadband and other public goods. This has left lawmakers scrambling to figure out how to pay for the legislation and once again put the IRS, whose funding and capacity to conduct audits has dwindled over the past decade, in limbo.
For conservative activists, who have harbored hostility towards the IRS for more than a decade, the agency is seen as an irrecoverable threat.
“As we learned in 2013, Democrats turned the IRS into a political weapon, and now they want an even more powerful IRS to target their political enemies like they did under Obama,” said David McIntosh, president of the Club for Growth. , a free enterprise group. “Their proposal is not profitable even according to optimistic estimates and this is just another example of the vicious tactics of the radical socialist left.”
The enforcement provision that had been envisioned in the bipartisan plan was already lightened from what the Biden administration had originally proposed, which would give the IRS an additional $ 80 billion and include much more rigorous financial reporting for help fight tax evasion. The White House estimates its proposal could bring in up to $ 700 billion over 10 years. Biparty lawmakers envisioned a more modest plan, which would give the IRS $ 40 billion with the goal of generating $ 140 billion in unpaid tax revenue. That proposal would not have included more stringent reporting requirements, which Republicans have criticized as government overbreadth and invasion of privacy.
Republicans, in theory, support measures to tackle tax evasion, but not if it means paying the IRS money and doubling the size of its staff, as the Biden administration has proposed.
The tax collection agency has never been particularly popular with Republicans, who tend to adopt small government and low taxes. But their animosity towards the IRS became more passionate in 2010, after Democrats and the Obama administration used it as a tool to enforce the Affordable Care Act requirement that everyone buy insurance. disease. Republicans eventually repealed the penalty tax that applied the mandate in 2017, but the health law remains in place.
“Generally speaking, Republicans have this theory that the best government is either no government or a very small government,” said John Koskinen, who served as IRS commissioner from 2013 to 2017. “To the extent where you deny the government the ability to collect the taxes owed, you limit the government’s ability to expand its operations.
Passage of the health care law, known as Obamacare, coincided with the rise of the conservative Tea Party movement, which spoke out against government spending. The move eventually became a target of the agency’s enforcement powers, further weakening relations between Republicans and the IRS
The IRS was criticized for its aggressive questioning of conservative groups in 2013. After an increase in tax exemption requests from 2010 to 2012, the agency admitted that it had started to distinguish terms such as “Tea Party.” and “patriot” as a shortcut to determining whether organizations engaged in welfare, which would qualify them for tax-exempt status, or if they could be political organizations.
That year, Lois Lerner, director of the IRS division that oversees tax-exempt groups, apologized for making mistakes and showing poor judgment. Mr. Obama then called for the resignation of Acting IRS Commissioner Steven T. Miller and said the agency’s actions were “inexcusable.”
Republicans have never let go. In 2015, Senator Ted Cruz of Texas, who was running for the Republican nomination, called for the abolition of the IRS.
A 2017 report by the Inspector General of the Treasury found that the IRS was also inappropriately targeting groups with progressive leanings, flagging up words such as “progressive,” “occupy” and “green energy.”
This spring, as lawmakers considered the Biden administration’s proposal to step up IRS enforcement, Republicans’ anxiety was palpable.
“My underlying concern is that the IRS contains an immense amount of power,” Representative Adrian Smith of Nebraska, the top Republican on the House revenue subcommittee, told a hearing last month. . “I was at the airport some time ago and noticed that there was an IRS agent who was authorized to walk around the magnetometers at the airport.”
While some Republicans appeared willing to help the IRS this year, anti-tax groups like Americans for Tax Reform, which still has influence over the party, rallied to make them think again.
Grover Norquist, the president of Americans for Tax Reform, told Republicans to remember the IRS was responsible for the Tea Party movement’s demise and warned them that the Biden administration would step up audits of small businesses if the agency had more resources. and power. He took issue with the idea that Democrats could raise hundreds of billions of dollars in uncollected tax revenue and said Republicans should avoid joining such a plan at all costs.
“This is wrong on every level,” Mr. Norquist said. “It is a false way of pretending that you are paying for something.”
Ohio Republican Senator Rob Portman, who negotiated with the Democrats, admitted on Sunday that the IRS would be barred from any deal because of his party’s resistance.
“Well, one of the reasons that is not part of the proposal is that we had a pushback,” he told CNN.
The recent disclosure of the tax information of some of the wealthiest Americans has provided more material for critics of the IRS to argue that it shouldn’t have more power or resources. A group of right-wing advocacy organizations led by the Taxpayers Protection Alliance wrote to members of the House and Senate this month, suggesting the disclosures were politically motivated and urging them not to support legislation providing for additional IRS funding.
“The new money spent on the IRS under the infrastructure plan would mean that the agency is stepping up its focus on certain groups,” they wrote. “Given the agency’s history and even the most recent actions, this should be about the nation.”
Despite the hindsight, many economists and IRS officials believe that without more qualified line staff and funding, the agency lacks the capacity to successfully audit the wealthy taxpayers and the sophisticated corporations that operate the system. tax and do not pay what they owe. Charles P. Rettig, the IRS commissioner, estimated in April that the United States lost about $ 1,000 billion in unpaid taxes each year.
Biden administration officials have continued to explain why the IRS needs more money and Democrats are likely to continue their plans to overhaul the agency through the fast-track process known as budget reconciliation. , which would alleviate the need for Republican votes, if such funding remains excluded from a bipartisan infrastructure package.
Natasha Sarin, a Treasury Department official who led the development of the proposals to narrow the tax gap, said on Twitter this week that the IRS had fewer listeners than at any time since World War II and that the fiscal deficit has cost the United States. 3% of gross domestic product per year. She argued that the problem was “serious” and had created “deep inequity” in the economy that could be resolved by giving the IRS more resources and information.
“Ordinary workers fully respect their tax obligations”, Ms. Sarin said. “The companies and the wealthy executives who employ them are often not. “