Even as the Biden administration continues to tout deficit reduction figures from the Inflation Reduction Act (IRA), the administration’s subsequent decision to cancel $10,000 in student debt per borrower is steadily undoing any progress that the IRA may have made in addressing the deficit and inflation. But it’s not just the student debt cancellation that is reducing the impact of the IRA — it’s also changes to the IRA itself.
The Congressional Budget Office (CBO) has revised part of its estimate for tax revenues in the IRA. The law provides $80 billion to the Internal Revenue Service (IRS), with the bulk of that money, or $46 billion, going to boost enforcement of tax laws and audits of taxpayers. CBO had originally determined that this budget increase would increase tax collections by $203.7 billion through 2031.
In a letter released yesterday, the agency announced it had lowered the estimate of revenues from enforcement by a total of $23 billion to $180.4 billion. CBO cited two reasons for the revision and noted that the interaction between the two changes will reduce revenues more than either change would have separately.
First, there was a legislative change made to the IRA text after CBO had scored it that removed expedited hiring authority. This authority would have given the IRS more flexibility in bringing on new personnel at a faster rate. Without it, hiring will take longer. Since a lot of training is needed for auditors before they begin enforcement activities, CBO now projects that revenues will be lower over the 10-year window.
Second, Treasury Secretary Janet Yellen issued a directive that the additional resources provided in IRA "shall not be used to increase the share of small business or households below the $400,000 threshold that are audited relative to historical levels." The Biden administration had previously vowed that it would not raise taxes on anyone making less than $400,000.
Senate Finance Committee Chair Mike Crapo (R-ID) had offered an amendment to the IRA during its deliberation that would have prevented the IRS from using any of the funds to audit taxpayers with taxable incomes below $400,000. CBO had estimated this amendment, which was defeated on a party line vote, would have reduced revenues by $20 billion. With this new directive, CBO says that increased tax collection under IRA from those making less than $400,000 will constitute a "small fraction" of total increased collections. It also clarifies that it does not have a strong basis for precisely estimating the increase from these taxpayers for all types of enforcement activities, due to a lack of information.
In addition, CBO's estimated deficit reduction in the rest of the IRA would total $90.5 billion over ten years. The tax revenues could not be counted in the official estimate because of the reconciliation rules, but combined, CBO's original figures found $294 billion in deficit reduction. With the revision, that amount drops to $271 billion, eight percent lower.
Other deficit reduction measures in the IRA include new taxes that will impede economic growth, troubling changes to pharmaceutical policy including price controls, and a $122 billion gimmick further delaying a never-implemented Trump-era regulatory change.
CBO also announced yesterday that it will publish an updated cost estimate of the entire IRA in the first week of September. It is unclear if scores of other parts of the law will also be updated.
Lawmakers should also request that CBO rescore the IRA 1) without the $122 billion gimmick and 2) against its most recent budgetary baseline which was released in May 2022. Under the reconciliation instructions dating back to last year, CBO was required to score IRA and its earlier “Build Back Better” iterations against the July 2021 baseline.
The economic outlook has changed a lot since then. CBO Director Swagel has indicated that the impact of inflation on the budget tends to be a wash, with both higher outlays and higher revenues. But with higher interest rates also thrown in the mix, deficit concerns could grow.
Either way, scoring IRA based on more current conditions would provide a more accurate estimate of how IRA will impact the budget, especially in light of the $2.2 trillion – at a minimum – added to the deficit in the 18 months before the IRA was signed.