Nonresident Senior Fellow - Economic Studies
Executive Director, Marriner S. Eccles Institute, University of Utah
As the executive branch implements the Tax Cuts and Jobs Act, the Treasury and the Internal Revenue Service will issue dozens of significant regulations. It seems likely that these tax regulations will, for the first time, be systematically reviewed by the Office of Information and Regulatory Affairs (OIRA) within the Office of Management and Budget at the White House. Unlike regulations issued by other executive branch agencies, like the EPA or Department of Labor, IRS regulations generally skip this process and are reviewed, instead, by Treasury’s Office of Tax Policy. But the Trump White House is near to ending a decades-old agreement that had carved out almost all tax regulations from OIRA review.
There are substantial tradeoffs in making this change. On the upside, OIRA oversight could elevate the role economic analysis and increase transparency and accountability of regulatory choices—a role it serves well with respect to regulations for other agencies. But there are also downsides: It’ll take longer for the regs to be written, increasing uncertainty for taxpayers and delaying the implementation of new legislation. Because it hasn’t been in the business of reviewing tax regs, OIRA is thinly staffed on tax experts and therefore lacks experience and expertise in tax matters. And the usual OIRA approach to cost-benefit analysis does not transfer to tax analysis, which means new procedures and analytical tools will be needed.
More worryingly, the public debate over whether OIRA should review tax rules has largely been a political turf battle where vested interests press for Treasury or White House oversight based on which agency seems more likely to advance their own agenda. Rather than draining the swamp, politicizing tax regulations would only enrich it.
Rather than draining the swamp, politicizing tax regulations would only enrich it.
The important question is whether OIRA oversight would improve tax regulations. That’s a high bar, given the competence of Treasury and IRS officials and staff, and the open and responsive process Treasury follows and which taxpayers avail themselves. Done right, however, OIRA oversight could make Treasury tax regs better by elevating the role of economic analysis and increasing transparency for taxpayers and policymakers of the effects of proposed regulations and of regulatory alternatives.
I learned this firsthand when, during my time at Treasury, I worked on one of the rare tax regulations that did go through the OIRA review process—Treasury’s Section 385 Regulations, which clarified the treatment of corporate debt and reduced the benefit of a prominent tax avoidance scheme that fueled corporate inversions. Working with OIRA to write the regulatory impact assessment of the rule, Treasury economists produced revenue estimates, re-estimated the compliance burden on companies, and parsed out the economic consequences of alternative regulatory approaches. In the course of this process, Treasury economists contributed valuable input into the final rule that was responsive to stakeholder comments, helped avoid unintended consequences, and narrowed its scope, while still achieving the core purpose of the rule. The rule remains controversial, but there was widespread agreement that it had improved. The experience demonstrated that economic analysis has the potential to improve the development of tax regulations.
At the same time, however, the experience of shepherding a significant tax regulation through the OIRA process highlighted that existing OIRA procedures—and the Executive Orders that govern them—have substantial disadvantages when it comes to evaluating tax regulations. If OIRA is to review Treasury tax rules, a few changes to current processes could ensure they add value:
OIRA’s focus on cost-benefit analysis isn’t useful for analyzing tax regulations
First, OIRA’s regulatory process—and the procedures codified in Executive Order 12866 and OMB Circular A-4—need to be substantially revised to be relevant to the development and analysis of tax regulations. The economic analysis at the core of OIRA’s process focuses narrowly on assessing the costs and benefits of regulations imposing mandates on private behavior, like limitations on emissions of pollutants. But cost-benefit analysis cannot be used to assess tax regulations because tax regulations primarily govern transfers. Why not? Because all tax regulations fail cost-benefit analysis: they consume real resources, like taxpayers’ time, paperwork, and enforcement costs, and impose economic distortions, solely to effect a transfer to the government or to other taxpayers. Beyond the futility of assessing net benefits, requiring Treasury to perform cost-benefit analysis of tax regulations would not necessarily yield useful insights as to the quality of the rule or its economic effects.
Instead, regulatory analysis of tax regulations (and other transfers) should focus on measuring their revenue, distributional, and behavioral effects, and administrative and compliance burdens.
These are elements that Congress, the executive branch, and outside tax analysts regularly use to design and evaluate tax legislation, and which provide the basis for measuring the effectiveness (and cost-effectiveness) of proposed tax regulations. Such analysis is well developed and regularly conducted by economists at the Treasury, the Joint Committee on Taxation (JCT), and the Congressional Budget Office (CBO). By redesigning their processes to include relevant elements of this analysis in the course of developing significant tax regulations, OIRA oversight could improve the final rules, provide transparency into the decision-making of regulators, and provide valuable information back to Congress that it can consider in future tax legislation. The economists at the Treasury and IRS are well-equipped and the best able to analyze these economic considerations. It would be appropriate for OIRA to incorporate their input in the regulatory impact analysis of new rules.
In identifying rules that need additional scrutiny, OIRA’s current procedures will cast too wide a net
Second, the definition of what constitutes an “economically significant” tax rule, and thus warrants OIRA’s additional regulatory scrutiny, should be re-defined to focus analytical efforts where it is most beneficial. Right now, OIRA analyzes rules that have more than $100 million in annual economic effects relative to a pre-statutory baseline—i.e. compared to economic conditions that prevailed before Congress passed the relevant law, including any new transfers that result. Measuring economic significance relative to a pre-statutory baseline is particularly problematic for tax regulations because essentially all tax legislation involves a transfer above the threshold (even when other economic effects are small or there is no regulatory discretion). Moreover, for new legislation, Congress will have already received an assessment of the law’s revenue, distributional, and economic effects from JCT, rendering any Treasury/OIRA analysis duplicative and redundant in most cases.
The important question is whether OIRA oversight would improve tax regulations.
Instead, economic significance should be defined by whether the new regulations could result in a significant departure from the effects anticipated when enacted. One option is to use the JCT’s score as the baseline for new legislation—regulations should only be economically significant when they result in revenues or economic effects that deviate by more than $100 million per year from the JCT concurrent estimate. For instance, if Congress enacts legislation scored by JCT as raising $100 million per year, there is no regulatory discretion and the law is implemented as written. The legislation might be economically significant, but the regulation is not. Regulations where economic effects could differ from JCT’s analysis by more than $100 million could still be reviewed, as would revisions to existing regulations (or unused regulatory authority), where the revenue or economic effects exceeded $100 million relative to current practice. For new legislation, this would speed up implementation and reduce duplicative economic analysis. Take the TCJA, for example, for which we have recent JCT analysis and where Treasury often has little regulatory discretion over many specific provisions. Excluding such regulations from review would speed the implementation of the law and focus Treasury and OIRA resources on issues where regulatory discretion is important, economic analysis is most beneficial, and transparency most helpful to legislators.
Similarly, most IRS rules are recurrent updates, sub-regulatory guidance, or routine correspondence, like Private Letter Rulings, which could trip a naïve test of economic significance just because they refer to nominally large economic elements. When the IRS publishes monthly interest rates, those rates might apply to billions of dollars of transactions, but the IRS role itself is not significant. Such regulations do not merit such scrutiny and would overwhelm OIRA if reviewed. Most routine tax rules should face the same oversight as routine regulations from other agencies. At FAA and NOAA, for instance, agencies that are among the top issuers of federal regulations, frequent updates to aviation safety updates or signals to close or open of a fishing season are excluded from review. Routine updates to regulations, like the issuance of monthly updates to interest rates, Private Letter Rulings, and the bulk of sub-regulatory guidance also should be carved out.
OIRA can improve the process, but tax analysis is best performed by Treasury economists
Finally, it’s worth recognizing that the staff in the Office of Tax Policy at Treasury (like their peers at JCT) are the nation’s experts on the economic analysis of tax legislation. OIRA oversight of tax regulations should seek to elevate the importance of their analysis, not supplant it, and should focus on those procedural elements where OIRA is known for adding the most value, like ensuring alternatives are considered, promoting robust analysis of the economic effects of regulation, and providing transparency and accountability back to policymakers and the public.