After weeks of negotiations, the Treasury Department and Office of Information and Regulatory Affairs (OIRA) agreed last week that IRS regulations would be subject to the same analytical requirements and interagency review as other agencies’ rules. The April 11 memorandum of agreement (MOA) follows intense discussion between the two departments and increasing attention from the president and congress. As a former OIRA administrator, I think it strikes the right balance between ensuring regulations are well-reasoned and cost-effective, while not inhibiting the issuance of timely guidance for taxpayers.
OIRA plays an important regulatory oversight role
OIRA—a small office in the Office of Management and Budget—reviews all significant regulations from executive branch agencies before they are published. Democratic and Republican presidents have relied on the office since 1981 to provide what President Obama has called “a dispassionate and analytical second opinion” on draft regulations, both by coordinating interagency review across the government and by ensuring agencies have weighed the likely positive and negative consequences of their proposed actions.
But since 1983, tax regulations have been exempt from OIRA review based on agreement reached during the Reagan administration and renewed in the Clinton administration. Originally intended to be a narrow exemption applicable only to non-discretionary rules implementing the tax code, in recent years the exemption has allowed the IRS to issue regulations having large policy impacts with little evaluation or scrutiny. As a 2016 Government Accountability Office report observed, changes in the nature of tax regulations since the original agreement was reached argues for reconsidering the exemption:
Over the past three decades, the tax code has increasingly been used by policymakers as a tool for accomplishing social and economic objectives by creating special tax credits, deductions, and exemptions to achieve certain policy goals.
Congress & the President have urged change
Last year, President Trump issued an executive order directing Treasury to work with OIRA to examine its stock of regulations and to “review and, if appropriate, reconsider the scope and implementation of the existing exemption for certain tax regulations from the review process set forth in Executive Order 12866.” Earlier this month, the Senate Homeland Security and Governmental Affairs Committee sent a letter to the OIRA administrator, “strongly” urging her to “revisit the regulatory requirement between OIRA and Treasury…with a critical eye as to why this agreement is necessary.” The Committee called OIRA Administrator Neomi Rao and Treasury General Counsel Brent McIntosh to testify on April 12. Anticipation of this hearing is likely what led OIRA and Treasury to reach the agreement codified late in the evening of April 11.
The MOA is a solid compromise
The MOA provides that all significant tax regulatory actions will be subject to the analytical and review requirements of Executive Order 12866, which President Clinton issued in 1996 and each subsequent president has maintained. This means that OIRA will review these rules before they are published in proposed or final form. It also means that, for tax regulations with expected non-revenue impacts on the economy of $100 million or more, Treasury will conduct a regulatory impact analysis of the anticipated benefits and costs, quantifying those impacts “to the extent feasible.” To supporters of evidence-based regulation, this is a big win.
Performing this analysis will be new for Treasury, however, so the MOA gives the department 12 months “to obtain reasonably sufficient resources” to do so. Further, to assuage Treasury’s concerns that OIRA review would significantly delay regulations that taxpayers depend on to submit their returns, the MOA provides for a shorter review than does EO 12866. Rather than a 90-day review period, OIRA will conclude review within 45 days of submission, with an opportunity for an extension if both OIRA and Treasury agree. The MOA also provides for an even more expedited 10 business-day review for certain rules needed to implementing last year’s tax bill.
The MOA is a good compromise. Future tax regulations will benefit from the principled analysis and review required of other executive branch agencies, but follow procedures that respect the tight timeframes IRS faces.