It’s Time for a New Approach to OIRA Review of Tax Regulations
Tax guidance will be crucial for effectively implementing the tax provisions recently enacted in the Inflation Reduction Act (IRA). This post reviews the role of the Office of Information and Regulatory Affairs (OIRA) in reviewing tax guidance and explains why changes are needed to ensure that OIRA review does not hinder IRA implementation and the tax system more broadly.
By Brandon DeBot and Chye-Ching Huang
The Biden Administration is entering into an intense and high-stakes period for tax guidance. The recently enacted Inflation Reduction Act (IRA) includes a new corporate alternative minimum tax on the largest corporations operating in the US, a new excise tax on certain stock buybacks, and a historic investment in climate, most of which will be run through the tax code. In many ways, the effectiveness of these provisions will turn on how Treasury and the IRS implement them, which will require significant near-term regulatory guidance. The need for IRA-related guidance comes on top of taxpayers’ preexisting demand for regulations and other forms of guidance to clarify areas of law, which already far outstrips Treasury’s ability to keep up.
In this post, we detail an issue that could substantially influence the Biden Administration’s ability to issue timely and sound tax guidance: review by the Office of Information and Regulatory Affairs (OIRA). As we describe, OIRA historically had a limited role in the tax guidance process. This limited role aligned with several reasons why tax guidance is ill-suited to OIRA’s general framework for regulatory review. However, changes to OIRA’s review process instituted in 2018, shortly after the 2017 passage of major tax legislation known as the Tax Cuts and Jobs Act (TCJA), had damaging effects on the tax regulatory system. As a result, we recommend that the Biden Administration revamp the OIRA review process instituted in 2018. If left in place, the process threatens to undermine implementation of the IRA and completion of other high-priority tax guidance projects.
What is OIRA and its role in the regulatory review process?
OIRA was established within the Office of Management and Budget (OMB) in 1980 to oversee the Paperwork Reduction Act. As successive executive orders issued in 1981 and 1993 built out a framework for regulatory analysis that federal agencies were generally required to follow and vested OMB with a broader responsibility to monitor compliance with that framework, the oversight role was assigned to OIRA.
Although there are some differences between the executive orders, in broad strokes, both have generally required agencies to undertake a cost-benefit analysis for “significant” regulations, which include those likely to: (1) have an annual effect on the economy of $100 million or more (in which case they are considered “economically significant”); (2) create a serious inconsistency with another agency’s action; (3) materially alter the impact of entitlements, grants, user fees, or loan programs; or (4) raise novel legal or policy issues. The mandated cost-benefit analysis must, as the name implies, generally assess the potential costs and benefits of a regulatory action — though, as we will detail, exactly what that means is highly contested. In the case of economically significant regulations, the requirements are more detailed: Cost-benefit analysis for those regulations should include quantification, if possible, and a comparison of the regulatory action to potential alternative regulatory actions. Importantly, under Circular A-4 — OMB’s guidance on regulatory analysis — agencies may not consider tax revenues raised or the use of tax revenues through transfer payments when conducting these analyses.
OIRA is charged with ensuring that agencies adhere to the regulatory analysis framework. To that end, agencies generally must coordinate with OIRA about all planned regulatory actions and the determination of whether they are significant. They must also provide draft regulations to OIRA before publication, and OIRA is tasked with reviewing all regulations determined to be significant for compliance with the framework.
How did OIRA historically handle tax regulations?
In 1983, OMB entered into a memorandum of agreement (the 1983 MOA) with Treasury to memorialize their understanding of how the 1981 executive order setting out the regulatory review framework would apply to tax guidance. Most significantly, the 1983 MOA waived substantive OMB review of all but major “legislative” Treasury regulations. Under longstanding and fundamental administrative law principles, legislative regulations implement statutes for which Congress “simply provided an end result” and delegated rulemaking authority to an agency without more detail, whereas “interpretive” regulations interpret, explain, and apply the detailed provisions of the Internal Revenue Code. Agencies generally have more discretion in determining the substantive positions taken in a legislative regulation than they do for an interpretive rule. As has been noted in other contexts, Treasury and the IRS have historically taken the position that because most tax statutes are self-executing, most tax regulations are interpretive, and relatively few are legislative. Accordingly, under the 1983 MOA, most tax guidance was treated as exempt from OIRA review by reason of being interpretive rather than legislative, and substantive OIRA review and the requirement of cost-benefit analysis were generally focused on the tax regulations in which Treasury exercised the most discretion.
The 1983 MOA did provide a limited role for OMB to review Treasury’s determination that a rule was not major or not legislative, however. Treasury was required to submit to OIRA brief descriptions of forthcoming regulations and explanations of why they were not major legislative regulations. OMB would then have a 10-day window to review Treasury’s submission and determine whether OMB should review the regulation substantively or whether Treasury could proceed with the regulation without further OMB review.
Although the 1981 executive order was replaced with a new one regarding regulatory analysis in 1993 (EO 12866), the Treasury Department and OIRA confirmed that business would continue to proceed as it had under the 1983 MOA.
Why should tax rules be generally excluded from OIRA review?
OIRA’s framework for cost-benefit analysis is poorly suited to evaluating tax guidance
OIRA requires, through Circular A-4, the same analytical framework for cost-benefit analysis of all federal regulations it reviews. For regulations promulgated by some agencies, the framework detailed in Circular A-4 may appropriately focus the cost-benefit analysis on key costs and benefits that directly relate to the motivations behind and the primary effects of the regulatory action. In doing so, it may provide useful information to policymakers and the public, and it may illuminate the central tradeoffs between potential regulatory actions in other policy areas. But that is simply not the case for tax regulations. Instead, OIRA’s framework is fundamentally ill-suited to the evaluation of tax regulations because it fails to account for both revenues and distribution, two pillars of equitable tax analysis, for reasons persuasively explained by the Washington Center for Equitable Growth.
First, the analytical framework mandated by OIRA treats revenue effects as neither a cost nor a benefit, even though the fundamental purpose of taxation is raising revenues. Under this framework, lax regulatory interpretations that provide windfall gains for certain beneficiaries are viewed as having few or no costs. The framework does, however, consider compliance burdens to be a cost. As a result, the OIRA framework for cost-benefit analysis could perversely find that a regulation that capitulates to a form of corporate tax avoidance generates net benefits because corporate taxpayers would face a reduced cost of avoiding taxes and the lost revenue would not be treated as a cost. In a similar vein, more stringent regulatory interpretations that result in higher revenues may be judged to have net costs because the revenues are not counted as a benefit against any increased administrative and compliance costs.
Second, OIRA’s framework ignores the distribution of the tax burden in assessing the costs and benefits of tax regulations. This is misguided, because controlling the distribution of the tax burden is one of the fundamental purposes and effects of the federal income tax system. Further, although ignoring the distribution might appear neutral to some, in reality it tilts the analysis in favor of regressive outcomes. High-wealth taxpayers are generally able to avoid tax more effectively than low-wealth taxpayers. If a regulation adopts a position that is more generous to high-wealth taxpayers and thus reduces their efforts expended on tax avoidance, the OIRA framework deems the reduction in such efforts a benefit. Yet the framework ignores the distributional consequences of reducing taxes on the wealthy. Cutting their taxes, as a matter of arithmetic, has impacts on either deficits, or lawmakers’ decisions about the size and mix of federal spending and revenues, all of which could ultimately leave lower-wealth people worse off. The OIRA framework thus puts a thumb on the scale for reallocating taxes from the wealthy to everyone else.
In sum, using the current OIRA approach means that analysts are evaluating regulations implementing income, payroll, and transfer taxes through a lens that ignores primary reasons that those taxes exist — raising revenues and redistributing income. Such a framework cannot provide useful guidance to improve the quality of regulations that largely target revenues and distribution. And by excluding revenue and distributional effects from cost-benefit analysis, the OIRA framework biases the analysis in favor of regulatory giveaways and against regulations that protect the tax base. Regardless of the merits of OIRA-mandated cost-benefit analysis in other contexts, it cannot reflect the true costs and benefits of tax regulations.
Tax regulations are subject to an extensive review process by tax experts at Treasury and IRS, while OIRA lacks tax expertise
Tax regulations undergo an extensive review process at Treasury and the IRS before they are published. The IRS Office of Chief Counsel has hundreds of expert tax lawyers, career civil servants who work on the drafting process for tax guidance. Additionally, Treasury’s Office of Tax Policy and Office of Tax Analysis are dedicated teams of tax lawyers and tax economists, many of whom coordinate with the Office of Chief Counsel in developing tax guidance. Tax guidance must go through multiple rounds of internal clearance. For tax guidance to be published, it must be approved by the IRS Office of Chief Counsel, the IRS Deputy Commissioner for Services and Enforcement, Treasury’s Office of Tax Policy, and Treasury’s Assistant Secretary (Tax Policy).
By contrast, OIRA has limited expertise in tax issues. OIRA’s relative lack of in-house tax expertise compounds the issue of an inappropriate analytical framework, with the result that it has little to contribute to the review of tax regulations. The result of OIRA review of tax regulations is therefore duplicated efforts (including in considering the concerns of well-funded taxpayer representatives) and delay of tax regulations. These are substantial costs that deliver little apparent benefit, as discussed further below. Hiring more tax experts at OIRA would not solve the issue, either; unless OIRA hired dozens of tax experts, it would still have little to offer in comparison to the deep subject matter expertise at Treasury and the IRS, and further hiring would simply add further duplication to an already-extensive review process, making it a poor investment of resources. In sum, there is a compelling case for largely excluding tax regulations from OIRA review in light of the considerable review of tax regulations that is already conducted by Treasury and the IRS tax experts before they are published.
What happened to the tax regulatory process during the Trump Administration?
Over time, some lawmakers and the Government Accountability Office raised questions about OIRA’s limited review of tax guidance. Among the Trump Administration’s first points of action was a flurry of executive orders directing agencies to reconsider guidance in various ways, including revisiting OIRA review of tax rules. In response, Treasury and OIRA renegotiated the 1983 MOA and, a few months after TCJA was enacted, replaced it with a new memorandum of agreement (the 2018 MOA).
The 2018 MOA applies the general requirements of EO 12866 to a broader set of tax rules. It carves back on the exceptions from OIRA review in the 1983 MOA and contemplates more extensive interaction between OIRA and Treasury on the determination of whether a regulation is “significant.” Recognizing that the 90-day review period (with a potential 30-day extension) provided for in EO 12866 could unduly slow down tax guidance, the 2018 MOA provides for a generally shortened 45-day OIRA review period, which could potentially be shortened even further to 10 days for certain TCJA-related regulations. Under the MOA, Treasury was obligated to fully comply with the analytical requirements for economically significant regulations after one year.
What effects did the 2018 MOA have on the tax regulatory process?
Numbers of reviews dramatically increased, regulations were delayed, and there was less ability to respond to regulatory demand from taxpayers
Implementing TCJA was a significant regulatory undertaking, so the effects of the 2018 MOA were evident almost immediately. The number of reviews of tax rules reported by OIRA under EO 12866 grew dramatically after the 2018 MOA. From 1981 through 2017, OIRA reported only 55 reviews of IRS regulations under EO 12866, more than half of which were during a six-year period beginning in 1986 (the year of the most significant tax legislation enacted in the three decades before TCJA). Once the 2018 MOA took effect, there were 94 reviews of IRS regulations reported during the period from 2018 through October 2022. In other words, there were roughly 13 times as many EO 12866 reviews reported each year following the 2018 MOA as there had been on average in the years from 1981 to 2017. Furthermore, 45 post-2017 reviews were triggered by an economically significant designation, while only 11 pre-2018 reviews related to rules considered economically significant.
The dramatically increased number of reviews and amount of resources dedicated to the OIRA review process led to substantial delays in issuing regulations. The format adopted for cost-benefit analyses pursuant to the 2018 MOA generally required Treasury to draft — and OIRA to review — additional discussion of alternatives considered, comments thereon, and responses to those comments, notwithstanding that such discussion would have already been included in other sections of the regulatory preambles. This format was apparently required both for economically significant regulations and those deemed significant for other reasons, notwithstanding that the more detailed analysis is not required under EO 12866 or the 2018 MOA for non-economically significant regulations. Given these duplicative efforts, it is no surprise that a dozen pieces of guidance were under OIRA review for more than two months following the 2018 MOA. Most of these substantially-delayed rules related to TCJA and therefore could have qualified for the expedited 10-day review under the 2018 MOA.
The OIRA review process also delayed — and may have reduced the completion of — tax guidance beyond TCJA rules. Such delays have real costs: not only can guidance protect the integrity of the tax system by addressing avoidance schemes, but it can also provide clarity and certainty to taxpayers. Indeed, taxpayer demand for regulations and other forms of guidance to clarify areas of law has long outstripped Treasury’s ability to keep up, given limited legal staff and other resources, even before the 2018 MOA took effect. The OIRA review process mandated by the 2018 MOA consumes resources that could otherwise be used to respond to regulatory demand by taxpayers. In doing so, it appears to have weakened the tax system and harmed taxpayers by delaying guidance projects and reducing Treasury and the IRS’s ability to provide guidance requested by taxpayers.
To be sure, particular taxpayers’ ability to have a “second bite at the apple” with OIRA to try to achieve regulatory outcomes for regulations that are already moving may be more salient than the less obvious cost of other potential guidance that various other taxpayers want being delayed. There is no clear way for taxpayers and the public to know what regulations have been sacrificed or weakened due to delays or application of inappropriate analytical frameworks. But that makes it even more important for policymakers to consider and appropriately weigh these less obvious costs when considering how to set up a tax regulatory process.
Flawed analytical framework performed even worse in practice
As described above, OIRA’s framework for cost-benefit analysis cannot provide useful guidance for tax regulations because it ignores effects on revenues and distribution and skews the analysis toward regulatory giveaways. These shortcomings were confirmed by the post-TCJA experience with OIRA review. While tax experts criticized many TCJA regulations for providing unmerited windfalls to certain groups, the cost-benefit analyses for those regulations often failed to identify or analyze these windfalls. For example, regulatory giveaways in the interpretation of the new deduction for income from pass-through businesses, the tax on global intangible low-taxed income, and the base erosion and anti-abuse tax were subject to little or no critical analysis by OIRA. And while the cost-benefit analysis of the overly lax Opportunity Zone regulations acknowledged that they were adopting generous interpretations, it failed to provide meaningful information about how much revenue was lost as a result of the regulations or who would benefit from outsized gains. These analytical deficits are troubling, but they were entirely predictable based on OIRA’s framework for cost-benefit analysis.
Widespread application of OIRA’s framework for cost-benefit analysis under the 2018 MOA also exposed other analytical and practical issues. For example, the 2018 MOA specifically prescribes a no-action baseline for the determination of economic significance, contrary to the general practice under OIRA’s framework that allows agencies discretion to choose the baseline that is best-suited to the type of regulatory action they are considering. OIRA defines a no-action baseline as “what the world will be like if the proposed rule is not adopted.” As a result, the 2018 MOA appears to require the determination of whether a regulation is “economically significant” to compare the world with the regulation against a hypothetical alternative world in which Treasury and the IRS do not issue any regulation (but the statute to which the regulation relates has been enacted). A no-action baseline places scrutiny on the decision about whether or not to issue regulations, even though the nature of the statute may mean that Treasury does not have a meaningful choice over whether to regulate — especially when taxpayers are pushing for guidance, as they were post-TCJA and are now after enactment of the IRA.
Furthermore, in practice, for some post-TCJA regulations that were designated as economically significant, it is unclear how the baseline was applied because the regulations emphasize the lack of data to quantify the effects of specific regulatory choices and largely discuss their effects as providing for certainty and consistency, suggesting that in fact the consequences of the underlying statute were factored in. OIRA may have determined that it was not feasible to separate out the effects of the statute in the case of largely self-executing tax statutes. However, considering the effects of the underlying statute appears to be inconsistent with OIRA’s definition of a no-action baseline. It also provides little to no analytical value with respect to whether a regulatory action is economically significant, since it would focus the inquiry on the magnitude of the statutory effects decided upon by Congress, not regulatory consequences decided upon by Treasury.
Also calling into question the practical utility of OIRA review are post-TCJA examinations of draft regulations from pre- and post-OIRA review. These examinations mainly reveal expansions of pre-existing preamble discussions, any benefits of which seem to be outweighed by the substantial delays caused by OIRA review, although there have been no formal studies undertaken on the consequences of the 2018 MOA for the tax regulatory review process. In light of the substantial shortcomings we have described, it is no surprise that OIRA’s post-TCJA review process has received widespread criticism from all sectors of the tax community, including representatives of large taxpayers, academics, public interest organizations, and government officials.
What should be done to address issues in the tax regulatory process?
It is clear that the experiment with expanded OIRA review under the 2018 MOA has failed. The cost-benefit analysis required by OIRA review starts from a flawed and systematically biased analytical framework. And it performed even worse in practice. The 2018 MOA process not only resulted in system-wide slowdowns due to the demand for additional Treasury resources to coordinate with OIRA about what regulations will be reviewed, shepherd selected regulations through review, build out duplicative analyses of regulations, and negotiate over often unnecessary and ill-advised substantive policy changes. It also resulted in the ultimate delay of critical tax guidance demanded by taxpayers and needed for proper functioning of the tax system.
It is therefore past time to reconsider the 2018 MOA and the role of OIRA and cost-benefit analysis in the tax regulatory system. Treasury and OIRA should rescind the 2018 MOA and replace it with a new agreement that largely eliminates the requirement for cost-benefit analysis of tax regulations and OIRA’s authority to review that analysis and those regulations. A new agreement should provide for OIRA review that is very limited, as was the case prior to 2018. Further, to the extent that OIRA continues to play any role in reviewing tax regulations, the Administration should take a pragmatic approach to considering whether specific projects implementing major legislation under tight timeframes require further flexibility. For example, if OIRA continues to review projects involving exercise of substantial discretion, expedited consideration could be provided for urgent, priority projects, similar to the expedited consideration for TCJA regulations contemplated (but not always followed) by the 2018 MOA.
Separate and apart from seeking to minimize OIRA review and application of OIRA’s framework for cost-benefit analysis, Treasury should continue to build out and refine the analysis it offers when promulgating tax regulations. When Treasury is exercising substantial discretion and the effects of different applications of the law are substantial, it should provide a qualitative and — only when feasible — quantitative evaluation of tax regulations grounded in fundamental principles of tax policy, focusing on the effects of the regulation on revenues, distribution, and compliance costs. This analysis should focus on the decision points where Treasury and the IRS have substantial discretion to regulate differently, as that is the analysis that would most directly inform regulatory decision-making. In addition, Treasury should not conduct the analysis for regulations for which there is only one reasonable interpretation of the law or for which different applications do not have materially different effects on revenues, burden, and compliance costs. In those cases, the analysis is unnecessary because it would provide little insight into the tradeoffs of adopting regulations and it would not merit the staff time required to prepare an analysis.
By adopting a new agreement, Treasury and OIRA could improve the analysis of tax regulations and avoid the drawbacks that afflicted regulations implementing TCJA. Otherwise, expanded OIRA review of tax regulations under the 2018 MOA will weaken the Biden Administration’s ability to effectively implement the IRA and provide other high-priority guidance to taxpayers.
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