Exempting Tax Rules From White House Review Is a Step Backward

With little fanfare and no explanation, the Treasury Department and the Office of Management and Budget quietly signed a memorandum of agreement on June 9 exempting all tax regulatory actions from review by the Office of Information and Regulatory Affairs under Executive Order 12866.

The new agreement reversed a 2018 memorandum that pulled most tax regulatory actions into the OIRA review process and compliance with EO 12866. It also superseded earlier agreements from the Reagan and Clinton administrations that, while not exercised often, anticipated that Treasury and OIRA would coordinate on at least a small number of tax regulatory actions.

Treasury and the IRS now have an unprecedented degree of freedom from centralized executive branch review and oversight. The practical effect of the new agreement is a big step backward for transparency and accountability in the exercise of discretion over tax policy.

Turning to the Tax Code

To be clear, tax policy in 2023 covers much more than the traditional revenue-raising function that most members of the public associate with Treasury and the IRS. Economists and public policy specialists know that taxes are a regulatory tool that the government can wield to achieve many ends. For example, tax experts have long recognized that the corporate income tax exists as much to direct the actions and choices of corporate executives (and to limit corporate power) as to raise revenue.

Over the past few decades, however, Congress increasingly has turned to the tax code, and to Treasury and the IRS, to accomplish a wide range of social welfare and regulatory objectives through various tax credits, deductions, exclusions, deferrals, and preferences. Because of the Employee Retirement Income Security Act, the Affordable Care Act, and other statutes, both agencies are heavily involved in regulating health care, health insurance, and retirement plans.

Treasury and the IRS are also deeply engaged in regulating the nonprofit sector because of tax exemptions for nonprofit organizations and tax deductions for charitable contributions. Recent tax regulation projects addressed policy questions concerning low-income housing, carbon oxide sequestration, semiconductor manufacturing, and electric vehicle purchases, to name a few.

Congress doesn’t merely rely on these agencies to implement policy decisions already made. Despite being long on details in its own right, the tax code includes hundreds of instructions for the two agencies to adopt rules and regulations to elaborate statutory requirements, fill statutory gaps, and achieve congressional goals.

Through tax regulatory actions, Treasury and IRS officials make their own policy choices that narrow or expand benefit eligibility requirements, incentivize or discourage private party behavior, and impose or alleviate tax regulatory burdens, in addition to increasing or reducing tax liabilities. Their choices have real-world consequences far beyond who pays a few dollars more (or less) in taxes.

Role of OIRA

EO 12866 and OIRA review require agencies to identify where they have policymaking discretion and to disclose the costs and benefits of their discretionary choices in relation to policy alternatives. OIRA also facilitates an interagency review process that involves circulating proposed regulatory actions to policymakers in other executive branch departments, agencies, and offices whose own policy agendas might conflict.

OIRA personnel promote conversations to assuage concerns expressed through that process and sometimes coordinate negotiations of regulatory details among executive branch actors with conflicting views. Only the most significant agency regulatory actions are subject to OIRA review. For those actions, the upside of EO 12866 and OIRA review is a more thorough vetting of the agency regulatory actions with the biggest impact on the public, as well as greater transparency regarding agency policymaking.

Treasury and the IRS refuse to admit that tax regulatory actions carry their own consequences. Ignoring the policymaking discretion conveyed by the hundreds of grants of rulemaking authority in the tax code, the IRS maintains that the effects of most of tax regulations “flow directly from the statute” because it “contains the necessary legal authority for the action[s] taken.”

The implication is that Congress has made all the hard calls, that officials at each agency make no substantial policy choices on their own, and that tax regulatory actions don’t make a meaningful difference in the benefits taxpayers receive or the burdens they face. This attitude simply defies reality. But acknowledging the extent of the agencies’ discretion and complying with EO 12866 would require Treasury and the IRS to disclose and defend the consequences of their choices relative to the alternatives.

Agency Limitations

Treasury and IRS officials are dedicated public servants who genuinely want what’s best for taxpayers and the federal tax system. But they are neither infallible nor omniscient. While their employees have tremendous tax expertise, they don’t possess equal knowledge of the many other topics addressed by the social welfare and regulatory programs that Congress has asked them to administer.

Policymakers at both agencies claim they consult with their counterparts in other agencies. Yet, absent centralized OIRA review, the agency alone decides what to do with that input. Other executive branch officials have no means of ensuring that Treasury and the IRS will respect their concerns rather than minimize or ignore them.

Also, each agency historically has had a weak track record of documenting where tax regulatory actions reflect the exercise of discretionary authority and justifying those discretionary choices. OIRA personnel are the experts at these sorts of good governance practices.

We live in an era in which the taxpaying public is increasingly skeptical of government overreach, the perceived arrogance of government policy experts, and the potential for unchecked abuses of power by agencies such as the IRS. With transparency comes accountability.

EO 12866, OIRA review, and transparency in executive branch decision-making won’t resolve all the problems of modern governance, but they’re a good start. Retreating from EO 12866 and OIRA review for tax regulatory actions represents a backslide for the integrity of federal tax administration.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Kristin E. Hickman is the McKnight Presidential Professor in Law at the University of Minnesota, where she teaches federal income tax and administrative law courses. She was a special adviser to the administrator of OIRA from 2018 to 2019.