Impact of House and Senate IRS Funding Proposals

By Thalia Spinrad and Chye-Ching Huang

The FY2024 Financial Services and General Government Appropriations Act, as passed by the Senate Appropriations Committee, implements aspects of a deal that lawmakers struck earlier this year to suspend the debt ceiling until January 1, 2025 by proposing to:

• cut IRS’s mandatory funding by $10 billion; and
• limit annual IRS appropriations for FY2024 to $12.319 billion — the same nominal level as FY2023, which is a cut in funding after adjusting for inflation.

Appropriations bills in the House propose far deeper cuts: the House Appropriations Committee passed a version of the FY2024 Financial Services and General Government Appropriations Act that would cut IRS appropriations even before adjusting for inflation, and, in combination, House Appropriations subcommittee legislation would rescind $67 billion of the IRS’s mandatory funding.

Recap of debt ceiling deal

Our recently published paper provides context for the Senate and House proposals. It explains the impact of the debt ceiling deal on IRS funding levels. After decades of severe cuts to IRS funding, the Inflation Reduction Act (“IRA”) provided the IRS with $79.4 billion of additional, mandatory funding — available for the IRS to use at any time before FY2032 — to rebuild and transform service and compliance. The debt ceiling deal rescinded $21.39 billion of that funding: the legislation implementing the deal rescinded $1.39 billion immediately, and an additional $20 billion was to be rescinded through subsequent appropriations legislation. 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 moved up the date of a drastic year-over-year decline in IRS funding. Under the IRA, the mandatory money would have run out at the end of FY2031, but the debt ceiling deal moves that up to FY2030.

The now-accelerated cliff will have negative impacts on IRS activities well before the IRA funding runs out. The IRS will likely have to slow or reduce its delivery of service and compliance improvements in the years leading up to the cliff, because it will be impossible to responsibly hire or plan for multi-year projects as though the funds will continue.

Our recommendations

To avoid continuing to increase the deficit through IRS funding cuts that lead to lower collections of revenues from filers who are not paying the taxes that they owe, and to avoid further accelerating the problems caused by the IRS funding cliff, we recommended 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.

Senate Appropriations bill

The Senate Appropriations-passed bill sets IRS appropriations at $1.8 billion below the level requested by the Biden budget, and does not keep pace with inflation.

The IRS has stated that if appropriations levels are below requested levels, it will need to repurpose IRA money to fund core programs, as our paper explains in more detail. This means that the IRS would need to repurpose $1.8 billion of IRA funding in FY2024 alone to fill the gap left by the Senate appropriations level.

If IRS funding levels then continue to track NDD funding under the deal for FY2025 and begin to grow with inflation after that, the IRS will run out of IRA funds in FY2029.

Beyond the need to fill gaps left by discretionary appropriations, the Senate Appropriations bill preserves the remaining IRS mandatory money.

House bills

The Senate level, even though it does not fully maintain base appropriations funding, would nevertheless be a far less damaging scenario than the bills passed by the House Appropriations Committee and its subcommittees.

Our paper noted that the House Financial Services and General Government (FSGG) bill would appropriate only $11.2 billion in IRS funding for FY2024, which remains unchanged after passage by the full House Appropriations Committee. Assuming appropriations stayed at the same nominal level through FY2029, the IRS would have less than $800 million of IRA funds left in FY2029. This would, in practice, move the funding cliff up to the end of FY2028.

Additionally, House proposals from other subcommittees would directly rescind an additional $56.8 billion of IRS mandatory money. These additional rescissions are spread across bills introduced by three other House Appropriations subcommittees: Transportation, Housing, and Urban Development; Commerce, Justice, and Science; and Labor, Health and Human Services, and Education. When combined with the FSGG rescission and the $1.39 billion rescission earlier this year, House Appropriations subcommittee proposals would rescind a total of $68.4 billion of the $79.4 billion of mandatory funding provided to the IRS by the IRA. Considering the amount of IRA money already spent in FY2022 and FY2023 and the amounts already obligated beyond FY2023, this is essentially all of the IRS’s mandatory funding from the IRA.

The IRA mandatory funds allowed the IRS to embark on much-needed transformation and rebuilding efforts with a level of planning that would not be possible with only annual appropriations. Taken together, the House appropriations proposals would derail the IRS’s already-underway efforts. In doing so, they would decrease the amount of revenue that the IRS is able to collect and increase deficits.

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