What the new $80 billion for the IRS really means for your taxes

“Democrats’ new climate, health care, and tax package — known as the Inflation Reduction Act — includes nearly $80 billion in new funding for the IRS, which is supposed to help the chronically underfunded agency staff back up and boost enforcement measures to collect unpaid taxes from wealthy Americans.
The funding has become a political flashpoint in recent days among conservatives and some business groups, who have falsely claimed that the IRS will use the money to hire an “army” of 87,000 new agents who will target average taxpayers.”

“Administration officials have reiterated that they will focus enforcement efforts on wealthy Americans and large corporations.”

“The IRS’s budget has been cut by nearly 20 percent since 2010, impacting the agency’s ability to staff up and modernize half-century-old technology. In 2010, the IRS had about 94,000 employees. That number dipped to about 78,000 employees in 2021. Some of the agency’s computers still run on COBOL, a programming language that dates back to the 1960s.

Since 2010, the agency’s enforcement staff has declined by 30 percent, according to IRS officials, and audit rates for the wealthiest taxpayers have seen the biggest declines because of years of underfunding. The new bill is an attempt to change that.”

“The new funding is intended to help reduce the “tax gap,” or the difference between what people pay in taxes and what they owe in taxes, which the Treasury Department estimates is about $600 billion annually. The new money could help the IRS increase revenue by about $200 billion over the next decade, according to a Congressional Budget Office estimate, although the exact amount is hard to calculate and highly uncertain.

Natasha Sarin, a counselor for tax policy and implementation at the Treasury Department, said that for Americans making less than $400,000 a year, their chances of being audited wouldn’t increase from typical levels in recent years.

Instead, Sarin said, average taxpayers should have an improved experience filing their taxes because the funds would allow the agency to add staff. In the first half of 2021, there were fewer than 15,000 employees available to answer nearly 200 million calls, which is one person for every 13,000 calls, according to Treasury Department figures.”

“As a result of reduced staffing at the IRS, audit rates of individual income tax returns decreased for all income levels from 2010 to 2019, according to a recent Government Accountability Office report. Audit rates decreased the most for taxpayers with incomes of $200,000 or more.”

“A 2018 analysis by ProPublica found that while audits had declined most dramatically for the wealthy, the IRS continued to audit the lowest-income filers — recipients of anti-poverty tax credits, including the earned income tax credit — at relatively high rates.

Over the last decade, audit rates for multimillionaires have decreased by twice as much as audit rates for the lowest-income families who receive the EITC because it requires more resources to go after top earners, Sarin said.

The funding should allow the IRS to better target wealthy earners who aren’t paying their taxes because the agency will be able to upgrade its technology, Sarin said, reducing the chances that compliant taxpayers would be audited.

Janet Yellen, the Treasury secretary, reaffirmed similar commitments in a letter to the IRS commissioner last week.

“Contrary to the misinformation from opponents of this legislation, small business or households earning $400,000 per year or less will not see an increase in the chances that they are audited,” Yellen wrote.”

“Budget cuts and reduced capacity have led to a significant backlog of unprocessed tax forms. As of the beginning of August, the IRS had a backlog of 9.7 million unprocessed individual 2021 returns.”

“Sarin said the IRS would focus on hiring employees who have experience working with complex tax filings from large corporations and high-net-worth individuals. Audits of average taxpayers follow a significantly different process, she said.”

The Inflation Reduction Act, explained

“The policies overall aim to push American consumers and industry away from reliance on fossil fuels. The biggest share of the funding goes to tax credits and rebates for a host of renewable technologies — solar panels, wind turbines, heat pumps, energy efficiency, and electric vehicles. It includes incentives for companies to manufacture more of that technology in the United States. The law will also put funding into energy efficiency at industrial sites that can help lower the sector’s hefty carbon footprint, while dedicating some funds to forest and coastal restoration.
The IRA also breaks new ground on other problematic areas of the climate crisis. It sets the first methane fee that penalizes fossil fuel companies for excess emissions of the especially powerful climate pollutant. Another substantial part of the funding helps disadvantaged communities with monitoring and cleaning up pollution, and builds their resilience to climate impacts.

Beyond cutting climate pollution, the clean energy investments could also make a dent in inflation. According to Robbie Orvis, senior director at Energy Innovation, rising energy prices have driven roughly a third of the 9 percent rise in the overall Consumer Price Index this past year. By helping Americans become less reliant on fossil fuels, the spending helps ease the global oil crunch and cut consumer bills.”

“The agreement also includes a 15 percent minimum tax on corporations with profits over $1 billion. Senate Democrats note that while the current corporate tax rate is 21 percent, dozens of major companies, including AT&T, Amazon, and ExxonMobil, pay much less than that. Originally, the provision was expected to raise $313 billion, though new carveouts were added to win Sen. Kyrsten Sinema’s (D-AZ) vote, which give manufacturers and private equity firms more leeway when it comes to the new minimum tax rate. Those changes are likely to reduce the revenue this measure will bring in.

There is also a 1 percent excise tax on corporations’ stock buybacks, which are currently not subject to any taxes at all. That excise tax is estimated to raise roughly $73 billion in revenue.”

What could the Inflation Reduction Act mean for you?

“One big question is whether a bill called the Inflation Reduction Act will lower the decades-high inflation numbers that consumers are feeling at the grocery store and the gas pump.
As economists told Vox’s Li Zhou, the average American likely won’t feel the impact immediately or particularly significantly — its effect will be in a longer-term and macroeconomic sense.

“For the most part, this isn’t a bill about 2022,” Marc Goldwein, the senior policy director at the Committee for a Responsible Federal Budget, told Vox. “This is about 2023, 2024, 2025. It’s about helping the Federal Reserve to fight against persistent inflation. It’s not gonna be bringing down the inflation rate in the month of September.””

“the bill will allow Medicare to negotiate for cheaper prescription drug prices for certain very expensive medications and cap out-of-pocket prescription costs for Medicare beneficiaries at $2,000 per year. That unprecedented measure will lower the cost for consumers. A further measure requires pharmaceutical companies to pay a rebate to Medicare if they raise drug prices faster than inflation increases, NPR reported — presumably disincentivizing those companies from repeated price increases.”

“In addition to cementing Medicare’s new negotiating power, the bill also holds insurance subsidies for the Affordable Care Act through 2025, making health insurance more affordable for the millions of people who are insured through the health care marketplace. The initial subsidies were supposed to end this year, which would have meant increased premiums for the millions of people who qualified for free health insurance when Congress eliminated the income cap to qualify for federal assistance paying premiums.

The IRA also includes the largest-ever investments in climate change mitigation efforts, clean energy production, and climate justice programs, all designed to mitigate harmful effects of climate change in underserved areas.”

“While much of the financial incentives for pursuing clean energy and climate change mitigation are geared toward companies, there are rebates and tax credits available for people buying clean energy sources like heat pumps and rooftop solar panels. Those measures are aimed at making clean energy more available to more people, although solar panels, for example, cost about $11,000 in 2021 for a household setup.

The legislation also offers a $4,000 tax credit for low- and middle-income drivers to buy a used electric vehicle, and up to $7,500 for a new electric vehicle. Additionally, a study by the Rhodium Group estimates that the bill’s provisions will save households an average of $1,025 per year by 2030.”

“Even though all of these measures are in place, there is no question that the environmental actions and funding aren’t enough. The bill provides far less than what’s actually needed: a total system overhaul. It will be years before these programs will be implemented and pay off in the form of lower greenhouse gas emissions, better health outcomes for low-income communities, and improved clean energy infrastructure. However, it’s hard to deny that the IRA provides a glimmer of hope that it’s possible to start addressing some of the most pressing problems — including overwhelming health care costs and climate change.”

Hidden inside the Inflation Reduction Act: $20 billion to help fix our farms

“Farms cover roughly 40 percent of the country, and they’ve replaced countless ecosystems with vast fields of soybeans, corn, and cattle. Agriculture also accounts for about 11 percent of US greenhouse gas emissions.”

“The biggest chunk of money — roughly $8.5 billion — goes toward a program run by the US Department of Agriculture called the Environmental Quality Incentives Program. It pays for projects that restore the ecosystem or reduce emissions on farmland.
Farmers often use the money to buy and plant cover crops. These are plants, such as clover, radishes, or rye, that are rooted in fields that might otherwise be fallow to improve the health of the soil and prevent erosion. The idea is that the ground is always “covered” with something.

Cover crops also have a range of other superpowers, said Rob Myers, director of the Center for Regenerative Agriculture at the University of Missouri. During a drought, for example, they can lock moisture in the soil; during a flood, meanwhile, they help water more easily penetrate the ground.”

The US finally has a law to tackle climate change

“The IRA uses tax credits to incentivize consumers to buy electric cars, electric HVAC systems, and other forms of cleaner technology, leading to less emissions from cars and electricity generation, and includes incentives for companies to manufacture that technology in the United States. It also includes money for a host of other climate priorities, like investing in forest and coastal restoration and in resilient agriculture.
These investments, spread out over the next decade, are likely to cut pollution by around 40 percent below 2005 levels by 2030, according to three separate analyses by economic modelers at Rhodium Group, Energy Innovation, and Princeton University. The legislation helps move the US a little closer to its stated goal of cutting pollution in half within the decade.

The main climate change components of the Inflation Reduction Act look surprisingly similar to the version the House passed last fall, a measure widely celebrated by climate activists — although it’s smaller than the $2 trillion the Biden administration once envisioned. To win Sen. Joe Manchin’s (D-WV) support, Democrats added provisions that clear permitting roadblocks for some fossil fuel projects and force the Department of Interior to hold more offshore oil lease sales.”

“There is plenty the act does that is not about climate change. There’s funding for the Affordable Care Act, the IRS, and prescription drug reform. It also sets a corporate minimum tax — one of the ways the law helps tackle inflation. But this is arguably a climate law, as climate initiatives make up the biggest portion of the act’s investments.

The deal retains most of the key programs of the House’s Build Back Better Act, including consumer tax credits for solar panels and electric vehicles, and funding for domestic clean energy manufacturing.”

4 underrated parts of the Inflation Reduction Act

“One of the most damaging legacies of the intersection between racism and fossil fuels is how highways were built to cut through Latino and Black communities. The Federal-Aid Highway Act of 1956 alone displaced more than 1 million people, according to the Department of Transportation. People who remained near these roads, overwhelmingly communities of color, were exposed to more fine particulate matter from the tailpipes of cars and trucks.

That legacy lingers today. A mountain of research has shown how Black people nationwide are exposed to more damaging pollution from construction, power plants, roads, and industry than white people.

The Inflation Reduction Act includes a federal infusion of cash for community projects aimed at addressing some of the harmful effects of these projects. There is $3 billion marked for Neighborhood Access and Equity Grants, in addition to $1 billion already approved under the bipartisan infrastructure law last fall.

The money can be used for many things, including improving walkability, capping wells, installing noise barriers, and reducing the urban heat island effect. But one way communities could use the funding is to just remove a road, highway, or other types of damaging infrastructure. They can also reconnect communities divided by highways in other ways: “multi-use trails, regional greenways, or active transportation networks and spines.””

“Slashing climate emissions requires doing two things at once: electrifying things like cars and stoves that typically run on fossil fuels, while also cleaning up fossil fuels in the power sector so that pollution doesn’t just come from another source. That’s the reason the US will have to shut down its last 172 coal plants within the decade to finally make good on its climate promises.

One surprising policy to help with this transition made it into the final bill, even though it needed Sen. Joe Manchin’s (D-WV) sign-off: $10 billion in direct payments to rural electric co-ops that pay for the cost of a clean energy transition. The USDA will administer direct payments for these co-ops to retire coal-fired power plants.

Many of the last coal plants standing are serving rural communities. E&E News noted that “about 32 percent of the power that supplies co-ops nationwide came from coal in 2019.” Investor-owned utilities, by contrast, generated 19 percent of their electricity from coal in 2020.

These rural co-ops, which are collectively owned and governed by the communities they serve, have moved away from coal slowly more for economic reasons than political ones. These coal plants tend to be newer, and the communities they serve may be more risk-averse to transitioning to renewables because they have to pay directly for the cost of the transition.

But before rural communities can even think about transitioning to solar and wind, first they have to shut down the coal plants. And that can be expensive because it includes paying off any debts. (A separate $5 billion Department of Energy program in the bill offers loans that lower debts and costs for privately owned utilities to transition to renewables.)”

“The more controversial part of the bill is its funding of carbon capture for oil, coal, and industrial sites. Typically, these technologies have been used to just pump CO2 back in the ground for more drilling, rather than to do anything about the climate crisis. Still, prevailing climate science shows that some of this technology is probably needed to address the harder-to-decarbonize parts of the economy. So the federal funding for scaling new technologies could manage to go a long way over the long term.”

“the act includes $20 billion for “climate-smart” agriculture, which could help farmers store more carbon in their soil and plants.

Part of that money, for example, will go toward an initiative called the Conservation Stewardship Program, which essentially pays farmers to make their land more environmentally friendly, such as by planting cover crops. Cover crops, planted when the ground would otherwise be fallow, are one way to increase a farm’s potential to store carbon (and can also help avoid emissions).

Another $5 billion in funding goes toward preventing wildfires and protecting old-growth forests, which are rich in carbon. This is critical because the US is expected to lose more of its natural carbon sinks over time under business-as-usual scenarios.”

Congress Just Passed the Inflation Reduction Act. It Will Hike Taxes on Some Middle-class Households.

“Despite the bill’s name, independent analysts have found it will have virtually no impact on inflation. In reality, it is a pared-down version of what Biden originally pitched as the “Build Back Better” plan—it leaves aside much of the original bill’s spending, but it maintains a huge corporate tax increase, huge spending on green energy initiatives, and a plan to swell the ranks of IRS agents. What was originally a roughly $4 trillion proposal that would have relied heavily on borrowing ended up being something of a rarity in Washington: a bill that will raise more revenue than it spends.

And where will it get that revenue? Quite possibly from you. Households earning as little as $50,000 annually are more likely to see a tax increase than a tax break from the legislation.

In the final hours before the House vote, the Joint Committee on Taxation (JCT) completed a breakdown of how the bill’s corporate tax increases would affect households at various income levels. The JTC, a nonpartisan number-crunching agency within Congress, found that households earning between $50,000 and $75,000 are more likely to see a tax increase than a tax decrease next year.

Higher-earning households are more likely to see tax increases, but households earning more than $1 million next year are actually far more likely than lower-earning households to get a tax break.

That fits with what The Tax Foundation, a tax policy think tank, found when it analyzed the bill. The Inflation Reduction Act will “would also reduce average after-tax incomes for taxpayers across every income quintile over the long run,” the Tax Foundation reported on Wednesday. Those tax increases will reduce long-term economic output by about 0.2 percent and could eliminate 29,000 jobs, the group found.”

” Tax increases on corporations get passed along from the board room table to the kitchen table in a variety of ways: lower pay for workers, higher prices for consumers, and smaller investment returns for shareholders.”

The Sinema-Manchin split that shaped Dems’ deal

“After Manchin agreed with Senate Majority Leader Chuck Schumer on the party-line tax, health care and energy bill, the West Virginia Democrat found himself bargaining with fellow moderate Sen. Kyrsten Sinema. Both hard-nosed negotiators, the Arizona Democrat’s business-friendly tax-approach clashed sharply with Manchin’s more progressive positions on taxes.

Manchin sought to target the wealthy and ended up agreeing with Schumer to target the so-called carried interest loophole that allows some people to pay lower tax rates on investment income. He also signed off on a corporate minimum tax package that most Democrats believed Sinema supported.

Ultimately, Sinema took a scalpel to the corporate minimum tax and scuttled any changes to carried interest, which Manchin called particularly “painful.” Triangulating between them through all of it: Schumer, whose job was harmonizing the views of the very public Manchin with an often-silent Sinema.”

The Time Has Come for a Transpartisan ‘Repeal’ Caucus

“The federal government’s decadeslong war on marijuana, one of the most life-mangling policies ever enacted, could be ended with a single sentence: The Controlled Substances Act shall not apply to marijuana.

Put it in a bill, vote on the bill, pass the bill, sign the bill, done. Much of the federal government’s drug war law enforcement machinery would grind to a halt. No legislative horse-trading, no Christmas tree–style gifts to favored constituencies, no giving old bureaucracies new responsibilities. Just the simple and urgent removal of the legal justification for grievous government harm.

This elegant approach, redolent of the 21st Amendment’s repeal of federal alcohol prohibition, is untenable to big-government lifers like Senate Majority Leader Chuck Schumer (D–N.Y.), as Jacob Sullum has repeatedly detailed in these pages. But it’s the shortest line to a point where a supermajority of Americans want policy to be. And it’s a template that could and should be used, at every level of government, by every flavor of politician.”