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The Treasury Department and the Office of Management and Budget (OMB) recently agreed that OMB would review many tax regulations before they are released, a reversal of a long-standing arrangement. This new process raises a host of fascinating issues for both agencies and for taxpayers, and will be the subject of a Tax Policy Center forum from 12:30 to 2:30pm on Thursday, September 20, at the Urban Institute. (Register here.)
The OMB Office of Information and Regulatory Affairs (OIRA) routinely reviews other regulations, but this process is new for most tax rules. Earlier this year, the two agencies signed a memorandum of agreement, which requires Treasury to prepare a cost-benefit analysis of any regulation projected to have an annual nonrevenue effect on the economy of $100 million or more. OIRA also will review other regulations deemed significant or that raise novel legal or policy issues.
As an alumnus of both the Reagan and Clinton Treasury Departments, I was skeptical of the value of OIRA review or the need for cost-benefit analysis applied to tax regulations. Treasury always has believed that its regulatory mandate was different from, say, the Environmental Protection Agency’s, which has a lot of latitude in implementing environmental laws. Treasury guidance has been aimed at interpreting statues that usually provide strong direction for Congress’s desired policy outcome.
Treasury regulations benefit taxpayers by easing compliance and reducing the risk of inadvertent noncompliance (although accompanying reporting and record-keeping requirements can be burdensome). In fact, taxpayers welcome most tax regulations because they provide guidance for specific types of transactions covered by the statute that the legislative language may not clearly address.
While some were concerned that OIRA’s review would delay release of regulations, the agreement imposes a tight turnaround on OIRA—45 days for most regulations and an expedited 10-day process for Tax Cuts and Jobs Act (TCJA) regs.
Two former OIRA Administrators from the Clinton and George W. Bush administrations argued strongly that Treasury’s tax regulations should not largely be exempt from routine regulatory review. Susan Dudley, who served Bush and now heads the George Washington University Regulatory Studies Center, put the case this way: “OMB provides what President Obama called ‘a dispassionate and analytical second opinion’ on draft regulations, both by coordinating interagency review and by ensuring that agencies have weighed the rule’s likely positive and negative consequences.” Ms. Dudley will be one of our speakers on Thursday.
The other major question is how Treasury should do the mandated cost-benefit analysis. In a new paper, speaker David Weisbach of the University of Chicago Law School and coauthors argue that Treasury can perform the cost-benefit analysis with existing revenue estimating tools. (The full paper is behind a paywall, but a synopsis is here.)
Under his framework, revenue-related benefits or costs equal the revenue change attributable to any behavioral responses to the rule. In addition, the analysis should include any costs and benefits unrelated to the tax system in its revenue-raising role, including Treasury’s best estimate of any compliance burdens on taxpayers and new administrative burdens on the IRS.
Commentator Greg Leiserson of the Washington Center for Equitable Growth is concerned that the new rule would mark a substantial departure for Treasury regulations—giving them the explicit mandate to improve the tax system rather than simply implement the law. Moreover, he argues that the OIRA measurement guidelines implicitly assume a dollar of revenues is worth exactly a dollar to society when in fact, it might be worth more (because it funds underprovided public goods) or less (because it funds less valuable activities). The rules also are indifferent with respect to the distribution of the tax burden even though policymakers and the public may care about reducing inequities. Leiserson argues that the economic analysis of tax regulations should focus on estimating the economic impacts, but that it should stop short of translating that objective assessment into a subjective assessment of the merits of the regulation.
Chye-Ching Huang of the Center on Budget and Policy Priorities will provide commentary and TPC director Mark Mazur will moderate the panel.
[Note: the penultimate paragraph was revised slightly from the original post to reflect two clarifications from Mr. Leiserson.]
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