IRS Budget Cuts and Tax Filing

April 9, 2015
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For taxpayers needing IRS help, this year’s filing season could be a nightmare. The Washington Post today reports on the long lines at IRS offices. The newspaper suggests that five years of Republican budget cuts are to blame, even though Democrats control the White House and, until recently, the Senate. But, whoever is at fault, the IRS commissioner is correct that his agency’s service is “abysmal.”

Let’s take a closer look at those alleged budget cuts. Using data from theOMB budget database, I split total IRS outlays into two activities: administration and handouts. Administration includes tax return processing, taxpayer help, enforcement, and other bureaucratic functions. Handouts are mainly refundable tax credits, particularly the earned income tax credit, child credit, and Obamacare exchange subsidies, which began in 2014.

The chart shows that the IRS budget for handouts has skyrocketed (red line). The IRS has become a huge welfare agency. Handouts quadrupled from $30 billion in 2000 to an estimated $121 billion in 2015. Handouts have spiked the past two years because of Obamacare exchange subsidies of $13 billion in 2014 and an estimated $29 billion in 2015. (Data for 2015 are the president’s estimates).

How about IRS administration costs? They have been relatively flat (blue line). They grew from $8.4 billion in 2000 to a peak of $12.3 billion in 2011, and then they dipped to an estimated $11.3 billion in 2015.

However, there have been large changes within the IRS administration budget. Here are 2005 and 2015 spending figures for the three largest administrative areas: “taxpayer services” spending plunged from $3.9 billion to $2.2 billion, “enforcement” spending grew from $4.3 billion to $4.9 billion, and “operations support” spending soared from $1.5 billion to $3.9 billion. The latter category includes general IRS bureaucracy, such as management, facilities, and telecommunications costs.  

Has the IRS budget been cut? Well, “taxpayer services” certainly have been cut, and so the Washington Post’s focus on taxpayer line-ups at IRS offices is on target. However, other aspects of IRS administration spending have increased. The huge jump in “operations support” actually occurred during the last few years of the Bush administration.

The larger story is how the huge welfare system run by the IRS is dwarfing its traditional role of collecting taxes. In 2015, IRS spending on handouts of $121 billion is eleven times larger than the $11 billion spent on administration. In the recent federal budget, the White House requests a giant $45 billion for Obamacare exchange subsidies in 2016, which would be four times larger than total IRS administration costs.

A short-term solution for the long lines at IRS offices would be for Congress to trim handouts a tiny bit and use the money to hire more workers to answer taxpayer queries. The long-term solution is to greatly simplify the tax code. That would include eliminating all $121 billion of tax-code handouts and moving to a flat tax or a simplified two-rate system.

Data note: if you send me an email (cedwards@cato.org), I can send you my IRS budget spreadsheet.

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