Debt Ceiling Deal’s Cuts to IRS Funding Bring the IRS Funding Cliff Closer: Appropriators Should Not Compound Harm

By Chye-Ching Huang, Thalia Spinrad, and Kathleen Bryant

We recently published a paper explaining the mechanics of the debt ceiling deal and impacts on IRS funding, the looming funding cliff, and our recommendations. You can read the full paper here.

The deal to avoid US default by suspending the debt limit until January 1, 2025 cut IRS funding by $21.39 billion. That will effectively come out of funds that the Inflation Reduction Act (“IRA”) provided to the IRS to rebuild and transform service and compliance after a decade of severe cuts to its funding. The Administration has some ability to determine when those cuts will have impacts on IRS activities but can only do so much to delay the damage.

The deal also caps non-defense discretionary (“NDD”) spending for FY2024 and FY2025 and sets non-binding targets for total discretionary spending for FY2026 to FY2029. How lawmakers choose to implement the FY2024 and FY2025 caps through the annual appropriations process, and whether they implement the FY2026 to FY2029 targets, could further impact IRS funding and activities.

Lawmakers who demanded cuts to IRS funding in the debt ceiling deal — and who propose even more cuts in FY2024 appropriations — say they are concerned about our nation’s fiscal future. But Congressional Budget Office estimates show that IRS funding cuts cost more than they save. IRS funding cuts increase deficits by undermining efforts to ensure that the largest corporations and highest-income Americans pay the taxes that they already owe under the law.

In a recent paper, we describe the mechanics of the deal and recommend that lawmakers:

1. Appropriate IRS funds for FY2024 at the levels requested by the Biden budget. This is a modest level that roughly keeps pace with inflation and population growth and is sufficient merely to maintain core operations funded by appropriations. At the very least, IRS appropriations overall and for enforcement specifically should not shrink in inflation-adjusted terms relative to FY2022 levels and should not lose further ground relative to other NDD spending.
2. Preserve the remaining IRA mandatory money. If lawmakers set IRS base appropriations below levels needed to maintain core operations, the agency may be forced to use the IRA’s mandatory money to fill holes in base funding, which would amount to even larger cuts to the IRA’s IRS funding than under the debt ceiling deal. Lawmakers also should not make any further outright cuts to the IRA mandatory money for the IRS.
3. By the end of 2025, when the next major tax legislation is likely, address the cliff in IRS funding. The debt ceiling deal means that the IRS will run out of IRA mandatory funds more quickly, and that funding cliff will have operational impacts well before the funding entirely runs out. Addressing the cliff can no longer be left to later in the decade.

Instead of mitigating the damage, the House Financial Services FY2024 appropriations bill proposes compounding it by cutting IRS base appropriations even more harshly than the deal cuts NDD spending after adjusting for inflation. Specifically, the bill proposes cutting IRS appropriations in FY2024 by $1.1 billion from FY2023 nominal levels. This means that IRS appropriations would face even deeper inflation-adjusted cuts than overall NDD spending will face under the deal.

All the bill’s cuts to IRS funding would come out of enforcement, the part of the IRS budget that ensures that filers pay the taxes that they already owe under the law. The bill would also prevent the IRS from offering Americans a free and easy option for electronically filing their taxes.

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