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IRS Cuts in Debt Ceiling Deal Will Cost Over $40 Billion in Lost Revenue

Sheldon Whitehouse, chair of the Senate Budget Committee, pointed out that the cuts will add $19 billion to the deficit.

Speaker of the House Kevin McCarthy holds a news conference after the House passed the Fiscal Responsibility Act of 2023 in the U.S. Capitol on May 31, 2023, in Washington, D.C.

A preliminary analysis from the Congressional Budget Office released Thursday estimates that the $21.4 billion in IRS funding cuts that Republicans and the Biden White House agreed to enact as part of their debt ceiling agreement would result in $40.4 billion in lost tax revenue — adding to the federal budget deficit.

The CBO provided its estimate to Sen. Sheldon Whitehouse (D-R.I.), who said in a statement that “after holding our entire economy hostage and threatening to trigger a global financial meltdown, Republicans protected wealthy tax cheats and creepy billionaires.”

“Republicans’ fealty to their megadonors is on full display, as is the hypocrisy of forcing cuts to the IRS that add $19 billion to the deficit,” said Whitehouse, the chair of the Senate Budget Committee. “By contrast, President Biden’s budget would have cracked down on wealthy tax cheats while making pro-growth investments in workers, families, and small business — and reduced the deficit by $3 trillion.”

“There’s a sharp contrast there,” the senator added, “and the best explanation is Republican fealty to their dark-money megadonors.”

The debt ceiling legislation that is now headed to President Joe Biden’s desk after the Senate passed it late Thursday includes $1.4 billion in cuts to IRS funding that was aimed at providing the agency with the resources to pursue rich tax evaders, who cost the federal government tens of billions of dollars in revenue each year.

By itself, the $1.4 billion IRS cut would add $900 million to the deficit over a 10-year period, according to a separate CBO analysis released earlier this week.

But the White House and Republican leaders also reached a tentative side deal to cut $20 billion more from the chronically funding-starved agency over the next two fiscal years and use the money to prevent cuts to other federal spending programs.

Having secured an agreement to slash IRS funding, House Republicans are reportedly planning to introduce a massive tax-cut package later this month that includes provisions the CBO says would add roughly $3.5 trillion to the deficit over the next decade.

“House Republicans have proven once again that there is nothing they care about more than making sure the ultra-rich can avoid paying taxes,” Morris Pearl, chair of the Patriotic Millionaires, said in a statement Wednesday. “In a fight they claimed was about shrinking the debt, they decided to prioritize rolling back IRS enforcement funding in a move that will actually increase the debt by billions. They have gone to bat to protect wealthy tax cheats, and won.”

The $20 billion in IRS cuts — a quarter of the $80 billion funding boost the agency received under the Inflation Reduction Act (IRA) — aren’t a sure thing.

As The American Prospect’s David Dayen explains, the debt ceiling legislation headed for President Joe Biden’s desk “only creates topline numbers, baselines for future budget appropriations that have yet to be written.”

If the spending bills don’t pass by January 1, 2024, Dayen notes, “the IRS fund transfer, which is not in the deal and is just presumed as part of the appropriation, would not happen.”

Jon Whiten, communications director for the Institute on Taxation and Economic Policy, wrote in a blog post on Thursday that the funding “is critical to allowing the IRS to do one of its most important jobs: crack down on tax cheating by the extremely wealthy and by big corporations.”

“The IRS has had a hard time doing this lately because its enforcement budget was cut by about a fourth between 2010 and 2021,” Whiten noted. “This led to 40% fewer revenue agents—the auditors uniquely qualified to examine the returns of high-income individuals and corporations.”

“Ironically, for Republican leaders who have spent months clamoring about the deficit,” Whiten continued, “these cuts to the IRS will increase the deficit by reducing the revenue the agency is able to collect from those who owe,” Whiten continued.

“Perhaps it’s less ironic and more on-brand,” he added, “given that these same Republican leaders want to quickly pivot to pushing through more big tax cuts that will disproportionately reward wealthy families and corporations.”

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