Kristin E. Hickman is the Harlan Albert Rogers Professor of Law at the University of Minnesota Law School.
In this article, Hickman argues that Congress should spin off some of the IRS's social welfare functions and regulatory programs so that the agency can return its focus to its primary role of collecting taxes.
Copyright 2016 Kristin E. Hickman.
All rights reserved.
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The IRS is stretched too thin across too many missions, which are often in tension with one another and take the agency far beyond its core competency. As it has done for decades, and increasingly so, Congress uses the IRS to implement social welfare and regulatory programs with, at best, a tangential relationship to the agency's traditional mission of raising revenue and enforcing the tax laws. This multi-tasking is taking its toll, pushing the IRS to a breaking point that threatens to undermine the viability of its primary role as the nation's tax collector.1 It is time to explore spinning off some of the IRS's many functions, so as to segregate revenue collection from the biggest and most politically fraught social welfare and regulatory programs that currently fall within the IRS's jurisdiction but not its expertise.
The IRC has always reflected nontax policy goals. Since practically the beginning of the modern income tax, Congress has used the tax system to regulate corporate activity through the corporate income tax;2 combat societal inequality through progressivity;3 and subsidize charities, state and local governments, and homeowners through itemized deductions,4 to name just a few examples.
In the past few decades, however, Congress has increasingly situated government regulatory and spending programs in the tax system. Tax expenditures have become "the dominant instruments for implementing new discretionary spending policies"5 targeted at the environment, education, welfare, and other nontax policy concerns. Some tax expenditures integrate easily with the tax laws -- for example, goosing the economy by allowing businesses to expense new equipment purchases under section 179. Others are more challenging. The IRS is now one of the federal government's principal anti-poverty agencies, because Congress uses refundable tax credits like the earned income tax credit and the child tax credit, rather than direct subsidies, to support working families.6 The Affordable Care Act and ERISA assign the IRS a key role in healthcare and pension regulation. And the IRS is the principal federal regulator of an enormous nonprofit sector, because the IRS evaluates applications for tax-exempt status and monitors continued compliance with eligibility requirements.
Many or even most tax expenditures are small.7 Other social welfare or regulatory programs that Congress has assigned to the IRS, like the EITC or tax-exempt status for charities, started small and grew substantially larger and more complex over time. Still other programs have been large and complicated from the outset, like the ACA. But even small programs can add up to a large burden if there are enough of them -- and the tax system handles hundreds of tax expenditures.
In short, Congress has moved the IRS from a mission-driven agency that collects taxes to an omnibus agency that must do many things. As Pamela Olson, former Treasury assistant secretary for tax policy, observed in 2010:
The continual enactment of targeted tax provisions leaves the IRS with responsibility for the administration of policies aimed at the environment, conservation, green energy, manufacturing innovation, education, saving, retirement, health care, child care, welfare, corporate governance, export promotion, charitable giving, governance of tax exempt organizations, and economic development, to name a few.8
As a result, even if the IRS maintains tax collection as its primary focus, it must dedicate substantial resources to those additional programs and functions. From 2008 through 2012, roughly 30 to 40 percent of Treasury regulations generated addressed tax expenditures and other social welfare and regulatory matters, rather than more traditional tax issues.9 Importantly, those regulations are not merely technical, focusing on the mechanics of this or that deduction or credit; rather, they are substantive, for example, defining who is eligible for government subsidies or determining what services insurance companies must support.10
Using an existing agency such as the IRS to administer new programs is not unique in American government. When adopting a new government program, Congress often taps an existing agency to administer it, even when the new program is not entirely germane to the agency's original or core mission. Establishing a new agency is time-consuming and expensive. Even when programmatic goals are not especially aligned with an existing agency's primary function, creating a new agency may make little sense if the existing agency's expertise is at least close enough to believe it can handle the additional responsibility.11 Nevertheless, when Congress tasks an existing agency with a new program or function, the general understanding is that the new program or function may take a back seat to the agency's core mission.12 As a result, the new program or function may be run somewhat less well or be somewhat less effective than might have been the case had Congress established a new agency. When an agency's multiple missions are in tension with one another, the agency may be particularly hard-pressed to accomplish both equally well.
No agency or government program design is perfect, and life and government both often require trade-offs. But congressional decisions to assign new programs or functions to the IRS are surely no different. Legal scholars have analyzed and explained structuring social welfare and regulatory programs as tax deductions or credits largely by reference to whether tax expenditures are more efficient economically and administratively than direct spending programs.13 Undoubtedly, the IRS has relevant expertise in measuring income and in designing the mechanics of large-scale credits and deductions. Yet the IRS's capacity to administer any one regulatory or social welfare program effectively (or at least effectively enough) does not automatically equate with a capacity to administer many, many of these programs simultaneously.
The integration of social welfare programs into the tax system has had a substantial effect on the profile of the people likely to have to engage in a meaningful way with IRS personnel. People whose only contact with the IRS was the rote annual task of filling out a relatively simple Form 1040 or even a Form 1040-EZ must now grapple with extra forms and instructions to avail themselves of various benefit programs. Mistakes lead to enforcement and penalties.14 At least anecdotally, the Tax Court has seen a significant shift in its docket toward unsophisticated, pro se taxpayers trying to sort out their eligibility for tax benefits. Taxpayers do not distinguish problems over their eligibility for the EITC or an ACA subsidy from difficulties over paying taxes on their income. Cumulatively, these negative interactions with the IRS can only serve to discourage voluntary compliance with the tax laws.
Culturally, the IRS is oriented toward raising revenue, maximizing collections, and protecting the fisc. Its mission statement emphasizes compliance, helping taxpayers "understand and meet their tax responsibilities" and ensuring that taxpayers "pay their fair share."15 IRS personnel have tremendous capacity to process and evaluate hundreds of millions of taxpayer filings and collect the taxes owed. But they are not typically social workers, environmental scientists, health policy experts, or First Amendment scholars. Consequently, however talented IRS employees may be at pursuing the IRS's traditional revenue-raising mission, they may not be as good at addressing the needs of socioeconomically disadvantaged persons, promoting new sources of energy, remaking the healthcare system, or recognizing when administrative decisions implicate politically sensitive values like freedom of speech or religion.16
Meanwhile, some of these regulatory and social welfare programs have drawn the IRS into political waters it is ill-suited to navigate. Last year's King v. Burwell17 decision showed the IRS dragged into a highly politicized controversy over taxpayer eligibility for ACA subsidies, a subject the Supreme Court recognized as outside the IRS's expertise.18 Even if one is inclined to give the IRS the benefit of the doubt when it comes to its past handling of sectcion 501(c)(4) exemption applications, only the most partisan ideologues think the IRS handled that controversy adeptly and escaped undamaged in the eyes of the average taxpayer.19 Agencies like the Environmental Protection Agency or the National Labor Relations Board may be expected to pursue partisan priorities. The IRS, by contrast, relies heavily on its reputation for fairness and impartiality, and it cannot afford to be perceived otherwise.
In short, Congress has set the IRS up to fail. And, in response to the IRS's inevitable slips, stumbles, and blunders, Congress has demonized the agency and cut its budget -- even as politicians from both parties call for adding to the IRS's burden by adopting even more programs for it to administer. Something, somewhere, has got to give.
It is undoubtedly impossible to extricate the revenue-raising function from all other social welfare and regulatory goals. Again, the IRC has never been completely value neutral, and attempting to make it so is a fool's errand. Nevertheless, the IRS is hardly the first agency to find itself overburdened with conflicting missions or tasks that turn out to be a poor fit. As agencies and times have changed, and government programs have evolved and expanded, Congress has often acted to restructure agencies, such as by reassigning functions or by splitting up an agency altogether.
One good example of this is what happened with the Interstate Commerce Commission (ICC), which was assigned a small, secondary task that grew too large and needed to be reassessed and reassigned. In 1910 Congress gave the ICC the responsibility of regulating telephone and telegraph services.20 The agency's primary expertise lay in the area of transportation services, but Congress perceived important commonalities between regulating railroads and regulating telephone companies. But the ICC's personnel remained primarily focused on railroads.21 As the telephone industry grew in size and complexity, the limitations of ICC oversight became more apparent.22 So Congress decided to spin off telephone regulation to the Federal Communications Commission, a new agency created specifically for that purpose.
A similar restructuring occurred with the Immigration and Naturalization Service (INS) after it was assigned tasks that while seemingly related, functioned at cross-purposes with one another and undermined the agency's ability to accomplish either. For decades the INS regulated immigration more or less comprehensively, acting as both an enforcement agency charged with border control and deportations, and as a service agency tasked with processing naturalization and visa applications.23 Culturally, the INS prioritized its enforcement functions, cultivating an enforcement mentality in training its employees, often resulting in apathy, suspicion, and hostility toward applicants for immigration benefits.24 Yet the INS relied on service fees as a key part of its budget, complicating its pursuit of enforcement goals.25 After the bipartisan U.S. Commission on Immigration Reform advised assigning the INS's enforcement and service functions to different agencies, Congress disbanded the INS and divided its functions among three new agencies -- U.S. Citizenship and Immigration Services, U.S. Immigration and Customs Enforcement, and U.S. Customs and Border Protection.26
Perhaps the time has come for a similarly radical restructuring of IRS functions. I have no precise blueprint in mind but suggest drawing from historical examples such as those mentioned above. For example, even if Congress wants to continue using tax credits and deductions rather than direct subsidies to accomplish social welfare goals, another agency could determine and monitor eligibility, handle enforcement of eligibility requirements, and then coordinate with and rely on the IRS to process the credits or deductions. Social workers with expertise in the issues faced by socioeconomically disadvantaged persons -- rather than tax experts -- could determine and monitor eligibility for the EITC, removing those responsibilities from the IRS's jurisdiction. Perhaps Congress could spin off exempt organization determinations and monitoring wholesale and have the responsible agency just provide the IRS with a list of approved entities. If the IRS suspects a problem with a particular entity, it could refer the matter back to the responsible agency.
Congress has burdened the IRS with too many secondary social welfare and regulatory programs, most of which have little to no relation to its primary function: collecting taxes. These secondary functions divert too many resources from the IRS's core mission. The IRS and its personnel lack the expertise to assess the political consequences of many of the day-to-day administrative decisions that must be made. Politically controversial decisions upset taxpayers and give rise to skepticism regarding the fairness and legitimacy of the tax system, thus imperiling tax compliance. Spinning off some of the largest and most politically fraught non-revenue-raising functions from the IRS, such as exempt status determinations or health policy administration, would allow the IRS to avoid this political turmoil and return its focus to its core expertise.
1 This thesis is explored more fully in two law review articles: Kristin E. Hickman, "Pursuing a Single Mission (or Something Closer to It) for the IRS," 7 Colum. J. Tax L. __ (coming June 2016); and Hickman, "Administering the Tax System We Have," 63 Duke L.J. 1717 (2014). Thanks to Nick Bednar for helping me condense ideas from those articles into this one.
2 See, e.g., Steven A. Bank, From Sword to Shield: The Transformation of the Corporate Income Tax, 1861 to Present 43-44 (2010) (acknowledging secondary regulatory goals of the corporate income tax); Reuven S. Avi-Yonah, "Corporations, Society, and the State: A Defense of the Corporate Tax," 90 Va. L. Rev. 1193, 1217-1220 (2004) (citing historical evidence in justifying the continuation of the corporate income tax on regulatory grounds).
3 See, e.g., Henry C. Simons, Personal Income Taxation: The Definition of Income as a Problem in Fiscal Policy 15-19 (1938) (discussing income tax progressivity); Meredith R. Conway, "Money, It's a Crime -- Share It Fairly, but Don't Take a Slice of My Pie!: The Legislative Case for the Progressive Income Tax," 39 J. Legis. 119, 130-132 (2013) (describing redistributive goals of income tax progressivity).
4 See, e.g., Allan J. Samansky, "Nonstandard Thoughts About the Standard Deduction," 1991 Utah L. Rev. 531, 540-543 (describing rationales for itemized deductions).
5 Edward D. Kleinbard, "The Congress Within the Congress: How Tax Expenditures Distort Our Budget and Our Political Processes," 36 Ohio N.U. L. Rev. 1, 3 (2010).
6 See, e.g., Francine J. Lipman, "Access to Tax InJustice," 40 Pepp. L. Rev. 1173, 1180-1184 (2013) (describing the history of the EITC as a program to alleviate poverty); Michelle Lyon Drumbl, "Those Who Know, Those Who Don't, and Those Who Know Better: Balancing Complexity, Sophistication, and Accuracy on Tax Returns," 11 Pitt. Tax Rev. 113, 120-123 (2013) (discussing the history of refundable credits with examples).
7 See generally Senate Budget Committee, "Tax Expenditures: Compendium of Background Material on Individual Provisions" (Dec. 28, 2012) (detailing 250 separate tax expenditures, including their relative size, and acknowledging that the list is not exhaustive).
8 Pamela Olson, "And Then Cnut Told Reagan . . . Lessons From the Tax Reform Act of 1986" (Woodworth Lecture, May 6, 2010), in 38 Ohio N.U. L. Rev. 1, 12-13 (2011) (citations omitted).
9 Hickman, "Administering the Tax System We Have," 63 Duke L.J. 1717, 1746-1750 (2014) (showing 30 to 40 percent of regulations concerned nontax social welfare and regulatory matters).
10 See, e.g., T.D. 9578 (addressing, among other issues, mandatory contraceptive coverage and accommodations for religious organizations that object thereto).
11 See, e.g., David A. Weisbach and Jacob Nussim, "The Integration of Tax and Spending Programs," 113 Yale L.J. 955, 987-990 (2004) (discussing the role of expertise in organizational design).
12 Rachel E. Barkow, "Prosecutorial Administration: Prosecutor Bias and the Department of Justice," 99 Va. L. Rev. 271, 307-312 (2013); see also David B. Spence and Frank B. Cross, "A Public Choice Case for the Administrative State," 89 Geo. L.J. 97, 119 (2000) ("That agencies are systematically more loyal to their basic mission seems persuasive, even obvious.").
13 See, e.g., Weisbach and Nussim, supra note 11, at 1023-1026 (analyzing the EITC in these terms); Eric J. Toder, "Tax Cuts or Spending -- Does It Make a Difference?" 53 Nat'l Tax J. 361 (2000) (analyzing tax expenditures versus direct spending programs).
14 See, e.g., Drumbl, supra note 6, at 132-139 (detailing the high audit rate for recipients of social welfare credits and the inappropriateness of traditional IRS enforcement methods for these taxpayers).
15 IRS, "The Agency, Its Mission and Statutory Authority," available at https://www.irs.gov/uac/The-Agency,-its-Mission-and-Statutory-Authority.
16 Cf. Jane H. Aiken and Stephen Wizner, "Law as Social Work," 11 Wash. U. J.L. & Pol'y 63, 64-67 (2003).
17 135 S. Ct. 2480, 2486-2487 (2015) .
18 Id. at 2489 (declining to apply the Chevron review standard to the IRS's interpretation of the Affordable Care Act because the IRS "has no expertise in crafting health insurance policy").
19 Compare, e.g., Lily Kahng, "The IRS Tea Party Controversy and Administrative Discretion," 99 Cornell L. Rev. Online 41 (2013) (detailing the controversy, describing the IRS's "ineptitude" and "bureaucratic bungling," and concluding that the incident "inflicted needless damage on the IRS").
20 Mann-Elkins Act, ch. 309, section 7, 36 Stat. 539, 544-545 (1910).
21 See, e.g., Kenneth A. Cox and William J. Byrnes, "The Common Carrier Provisions -- A Product of Evolutionary Development," in Max D. Paglin (ed.), A Legislative History of the Communications Act of 1934, 25-30 (1989) (comparing and contrasting congressional and ICC regulation of railroads and telephones).
22 Id. at 30 ("By 1934, interstate communications had risen to a level of importance requiring greater public attention than the ICC, still very busy with regulating railroads, was able to give it.").
23 See, e.g., Daniel W. Sutherland, "The Federal Immigration Bureaucracy: The Achilles Heel of Immigration Reform," 10 Geo. Immigr. L.J. 109, 113 (1996) (summarizing INS functions); Bennett J. Lee, "The Immigration and Naturalization Service: In Search of the Necessary Efficiency," 6 Geo. Immigr. L.J. 519, 521-522 (1992) (same).
24 See, e.g., Deborah Sontag and Stephen Engelberg, "Insider's View of the I.N.S.: 'Cold, Rude and Insensitive,'" The New York Times, Sept. 15, 1994, at A1 (describing INS employee training as "inculcate[ing] an intrinsic suspicion of immigrants" that "often translates into rudeness and even vindictiveness").
25 See, e.g., Sutherland, supra note 23, at 127-128 (documenting INS reliance on user fees).
26 Homeland Security Act, P.L. 107-296, 116 Stat. 2135 (2002); see also Deepa Iyer and Jayesh M. Rathod, "9/11 and the Transformation of U.S. Immigration Law and Policy," 38 Hum. Rts., no. 1, at 10 (Winter 2011).
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