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02/20/2018

Treasury and OMB are Reconsidering IRS Oversight Exemption

I’ve been writing about the series of self-created exemptions the Internal Revenue Service (“IRS”) has been using to evade oversight of its rulemakings.  One of those exemptions is tied to White House review pursuant to Executive Order 12,866 at the Office of Information and Regulatory Affairs.  Today, for the first time, the agency publicly revealed that it is in talks with the Office of Management and Budget (“OMB”) to review that exemption.

The Trump Administration’s Departments of Health and Human Services (“HHS”), Labor, and the Treasury just released a proposed rule that would allow Americans to buy short-term health insurance plans that would not be affected by the Patient Protection and Affordable Care Act’s mandates that are driving up premiums and limiting choice.  Housed within that proposed rule is a microcosm of the problem I’ve been highlighting.

On pages 17–28, HHS and Labor conduct a series of regulatory assessments, including an explanation of what the costs, benefits, advantages, and disadvantages of the proposed rule are.  They even include an analysis of the number of enrollees likely to take advantage of the proposal and the impact on the individual market exchanges.  IRS?  Not so much.  As has been its practice, the IRS simply claims that “[c]ertain IRS regulations, including this one, are exempt from the requirements of Executive Order 12866 . . .  Therefore, a regulatory impact assessment is not required.”

However, the IRS also reveals that CoA Institute’s efforts to urge the Trump Administration to review the exemption is starting to bear fruit.  The IRS states that “[p]ursuant to Executive Order 13789, the Treasury Department and OMB are currently reviewing the scope and implementation of the existing exemption.”

IRS Section from Proposed Rule on Short-Term Insurance

Here’s hoping they go further than simply review the scope and implementation, and resolve to end the practice that allows the IRS to give short shrift to the impacts of its rules, while other agencies, like HHS and Labor here, do their homework.

James Valvo is Counsel and Senior Policy Advisor at Cause of Action Institute.  He is the principal author of Evading Oversight.  You can follow him on Twitter @JamesValvo.

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02/16/2018

CoA Institute Files Opening Brief in Appeal of Decision that Imperils Low Cost Children’s Clothing to Families

Washington, D.C. – Cause of Action Institute (“CoA Institute”) today filed its opening brief in the Court of Appeals for the D.C. Circuit challenging a district court ruling issued last September that wrongly found that consignors who also volunteer at children’s clothing consignment events must be considered employees under the Fair Labor Standards Act (“FLSA”).

In 2013, the U.S. Department of Labor (“DOL”) sent our client, Rhea Lana Riner, a letter claiming that her company was in violation of the FLSA regarding minimum wages and overtime pay.  The government threatened steep fines if Rhea Lana did not comply.

CoA Institute Counsel Josh Schopf: “The FLSA is a decades-old law intended to protect vulnerable workers from exploitation. That is clearly not happening at Rhea Lana’s events, and the district court acknowledged that fact. Yet the court sided with the government anyway, attacking a business model that provides hardworking families and communities with affordable children’s clothing and goods. We prevailed once on appeal, and we hope to do so again.”

The brief states:

These are not unprotected workers lacking in bargaining power or workers toiling away for long hours in sub-standard conditions.  Common sense dictates that this activity does not require remediation of the type contemplated by the FLSA…

The District Court even acknowledged that Rhea Lana’s did not exploit any of the consignor/volunteers, yet somehow the court still accepted the DOL’s claims that the agency’s determination was consistent with the purposes of the FLSA.

The brief urges the Court to reverse the judgment of the lower court and declare that consignor/volunteers at these events are not Rhea Lana’s employees.

Case background:

Rhea Lana founded her clothing consignment business in her living room more than two decades ago. Since the company’s humble beginnings, Rhea Lana, Inc. has expanded as a franchise with dozens of locations across 21 states.

Rhea Lana’s semi-annual, consignment events allow families to consign their used children’s items and receive 70% of the proceeds. The events also allow families to save money by giving them the opportunity to purchase discounted goods. At the end of the event, consignors can collect their unsold goods or elect to donate them to charity. This model allows Rhea Lana’s customers to provide high quality items for their children at a price they can afford.

Yet in 2013, the U.S. Department of Labor conducted an audit, and sent Rhea Lana an enforcement letter claiming that her company was in violation of the FLSA regarding minimum wages and overtime pay.

With the help of CoA Institute, Rhea Lana fought back. Her company’s complaint was initially dismissed in 2014 for lack of a reviewable agency action.  On appeal, however, the Court of Appeals held that the government’s letter to Rhea Lana was subject to judicial review.  In September 2017, the district court ruled in favor of the government on the merits. CoA Institute continues to represent Rhea Lana in appealing the district court’s decision to the D.C. Circuit.

Watch a video about Rhea Lana’s story here.

For information regarding this press release, please contact Zachary Kurz, Director of Communications at CoA Institute: zachary.kurz@causeofaction.org.

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02/14/2018

Congress Investigates IRS for Trying to Evade Oversight

Over the past two weeks, Senate Committee on Homeland Security and Governmental Affairs (“HSGAC”) Chairman Ron Johnson and HSGAC Subcommittee on Regulatory Affairs Chairman James Lankford have sent two letters to investigate the Internal Revenue Service (“IRS”) claim that any economic impact from the agency’s rules is due to the underlying statute and not its regulatory choices.  Cause of Action Institute (“CoA Institute”) profiled the IRS claim, its implications, and the role of the White House Office of Information and Regulatory Affairs (“OIRA”) in a recent investigative report and op-ed.

HSGAC Letter to OIRA

On February 1, 2018, Chairmen Johnson and Lankford sent a letter to OIRA urging the White House regulatory office to reconsider a “longstanding agreement between [OIRA] and the Department of the Treasury to exempt regulations issued by the [IRS] from the requirements contained in Executive Order 12866.”

In 1983, OIRA, under President Reagan, agreed to create a three-tiered system to review IRS rules, which has resulted in very few IRS rules being sent to the White House regulatory office for pre-publication review.[1]  The IRS finally released the long-secret agreement in response to a Freedom of Information Act request from CoA Institute.  The Government Accountability Office (“GAO”) has also called for the agreement to be revisited.

In their letter, Chairmen Johnson and Lankford:

strongly urge[d] [OIRA] to revisit the regulatory agreement between OIRA and Treasury, as directed by President Trump’s EO 13789, with a critical eye as to why this agreement is necessary.  [They] also encourage[d] OIRA to implement all the recommendations in GAO’s September 2016 report and provide a full explanation to the Committee and Subcommittee in the event that OIRA declines to implement any of GAO’s recommendations.

The Chairmen also announced that they “intend[] to hold an oversight hearing in the very near future regarding OIRA activities.  The issues outlined in this letter will likely constitute a major part of this hearing.”

This effort is important because OIRA plays a key role in coordinating and legitimizing Executive Branch regulatory actions.  If an agency is able to make federal regulatory policy without oversight from the President, that policy not only lacks independent review but also political legitimacy.  OIRA is well-positioned to rein in the IRS and demand that the agency begin to do the same pre-publication regulatory cost-benefit analysis and economic-impact analysis as other federal agencies.

It will be interesting to hear OIRA Administrator Neomi Rao’s thoughts on the long-standing, long-secret memo at a congressional oversight hearing, as I do not believe OIRA as an institution has spoken on the issue since 1993.  Hopefully, Administrator Rao will take this opportunity to review and end the agreement between OIRA and Treasury and bring the IRS into line with other agencies.

HSGAC Letter to IRS

In addition, on February 13, 2018, Chairmen Johnson and Lankford sent a letter to Acting IRS Commissioner David Kautter presenting many of the findings from CoA Institute’s report.[2]  In their letter, the Chairmen summarized the report’s central finding:

[CoA Institute’s] report found that the IRS “takes the position that its rules have no economic effect because any impact is attributable to the underlying law that authorized the rule, not the agency’s decision to issue or alter the rule.”  The IRS’s position apparently dates back nearly 20 years, when the IRS Office of Chief Counsel issued a notice taking this position.  The report notes that while the IRS initially limited its economic analysis exemption to only “interpretative regulations and revenue impacts, both limitations fell away over time.”

The Chairmen asked the IRS a number of oversight questions, to learn more about the agency’s behavior and any justification it may have.  First, they asked whether “the IRS has conducted any retrospective economic impact analyses of regulations that did not receive an initial economic impact analysis.”  I am dubious that the IRS has done so.  If it believes its rules are exempt from initial economic impact analysis, I doubt its going back to see if it was right or wrong.  Any retroactive analysis likely would just shift blame back to the underlying statute again.

Second, the Chairmen noted that in 2016 “the Small Business Administration’s [(“SBA”)] Office of Advocacy wrote to the IRS disputing the agency’s assertion that the IRS’s regulations are not subject to the requirement to conduct economic impact analyses.”  The Chairmen want to know if the IRS ever responded to SBA or if any other agencies have pushed back on the IRS claim.

Finally, and perhaps most importantly, the Chairmen asked the IRS to “explain the process by which a determination is made as to whether the agency will or will not conduct an economic impact analysis on a proposed regulation.”  This final question is critical because, up to now, the IRS has provided very little explanation of how it goes about making the determination in an individualized case that a certain rule’s impact flows from the statute.  CoA Institute’s work in this area shows that the agency developed these self-bestowed exemptions over time, found them a convenient tool to avoid additional pre-publication work, and rarely gives more than a boilerplate claim that the exemption applies to certain cases.

It is heartening to see that Chairmen Johnson and Lankford are beginning the oversight process on this issue.  I look forward to seeing the responses from OIRA and the IRS.

James Valvo is Counsel and Senior Policy Advisor at Cause of Action Institute.  He is the principal author of Evading Oversight.  You can follow him on Twitter @JamesValvo.

[1] In 2016, CoA Institute found that “over the past ten years, the IRS has submitted only eight rules to OIRA for regulatory review and deemed only one of those rules significant.  Those eight rules are less than one percent of the final rules the IRS published in the Federal Register over the same period.”

[2] President Trump recently nominated Chuck Rettig to be the new IRS Commissioner, and CoA Institute has urged the Senate Finance Committee to press Mr. Rettig on whether he will end this IRS practice of evading oversight of its regulatory actions.

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02/13/2018

Regulation Czar Neomi Rao Discusses Deregulatory Agenda

In his State of the Union address last month, President Donald J. Trump patted himself on the back for the economic boom and the steady drop in unemployment over the past year. Many economists agree that he ought to take some credit, and suggest his deregulatory push has played a role. To discuss the Trump administration’s regulatory achievements, Neomi Rao, the president’s appointee for administrator of the Office of Information and Regulatory Affairs (“OIRA”) last week joined the Federalist Society’s Free Lunch Podcast.

Last year was “a banner year for regulatory reform,” Rao said in the beginning of the podcast.

When Trump took office, he signed Executive Order 13771, ordering agencies to eliminate two regulations for every new regulation added. It also capped the net cost of new regulations to zero dollars. This means that for every new dollar in regulatory costs, one offsetting dollar had to be cut from regulatory costs elsewhere.

Rao said that the administration lived up to Trump’s campaign promise – and then some. For every new regulation added, 22 regulatory actions were cut, which she said far exceeded his promise. Additionally, the net savings for Americans on regulations was $8 billion, also exceeding his promise. The administration also halted 1500 new rules proposed under the previous administration because, Rao said, it wants to analyze the scope and content of all regulations.

But more important than these small changes, according to Rao, the administration is striving to make structural and cultural reform, which would hopefully extend into future administrations. “We want to continue with the momentum from the past year and with the success that we had,” she said.

For example, Rao indicated that agencies must properly follow the Congressional Review Act (“CRA”), which Rao claims requires them to submit proposed regulations to OIRA, so it can determine whether it imposes a cost of $100 million or more. If it does, then OIRA sends the proposed regulation to Congress for approval. Agencies that don’t comply, she said, risk some of their rules losing legitimacy.

As Cause of Action Institute has pointed out over the past year, there are hundreds of rules that are currently vulnerable to be repealed under the CRA that have yet to be received by Congress. For example, last month Cause of Action Institute released an investigative report revealing the IRS has dodged compliance with the CRA and other oversight mechanisms by suggesting that its rules have no economic impact, a suggestion that we have argued is false and intended to shield the agency’s actions from oversight.

Apart from the economic effect of excess regulations, Rao said OIRA is working to make sure the government is more respectful of the separation of powers and more transparent. Because only Congress has the power to make laws, Rao said it can be dangerous to increase the power of the executive branch to the extent that it is making a lot of rule changes. To improve transparency, OIRA will ensure that agencies comply with a federal law that requires they give public notices of new rules and regulations so that the public and stakeholders have an opportunity to voice their support or opposition. Additionally, Rao said OIRA will be working to reduce paperwork for businesses to save them cost and time.

The Trump administration has made progress in the past year to cut regulatory red tape. Hopefully the administration can continue going in this direction with a series of structural changes to scale back the administrative state.

Tyler Arnold is a communications associate at Cause of Action Institute.

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02/9/2018

Rettig Nomination Gives Congress Chance to Hold IRS Accountable

Last month, Cause of Action Institute (“CoA Institute”) released an investigative report detailing a pernicious practice at the Internal Revenue Service (“IRS”).  The agency claims that none of the economic impact caused by its rules is attributable to its regulatory choices. Instead it says the impact flows from the underlying statute.  The IRS uses this claim to evade three important oversight mechanisms.  When we released the report, we called on Congress to press whomever President Trump nominated to be the next IRS commissioner to promise to reform this practice.  Well, Trump just nominated Chuck Rettig to head the agency.  So it’s time for Congress to stand up and hold the IRS accountable for its decades-long practice of playing by its own rules.

CoA Institute just sent a letter to Senate Finance Committee Chairman Orrin Hatch and Ranking Member Ron Wyden urging them to press Mr. Rettig on this issue during their face-to-face meetings and at a public hearing.

View the Letter Concerning Mr. Rettig’s Nomination Below

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James Valvo is Counsel and Senior Policy Advisor at Cause of Action Institute.  He is the principal author of Evading Oversight.  You can follow him on Twitter @JamesValvo.

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02/7/2018

CFPB’s Constitutionality Problem: Who’s Afraid of the Big Bad Wolf?

Who’s Afraid of the Big Bad Wolf?

Could a dispute over the constitutionality of the Consumer Finance Protection Bureau (“CFPB”) overturn a thirty-year-old Supreme Court precedent and vindicate the late Justice Antonin Scalia in one of his most famous dissents?  On the last day of January, the D.C. Circuit issued an opinion on the structure of that controversial independent agency:  PHH Corporation, et. al., v. CFPB, No. 15-1177 (D.C. Cir., January 31, 2018) en banc.   This opinion, with concurrences and dissents, is two hundred fifty pages long.  There is an awful lot to unpack, but this post will only focus on one glaring precedent that jumps out from the Opinion and every concurrence and dissent:  Morrison v. Olson, 487 U.S. 654 (1988)

In a quick review, I counted 43 citations of it in the Opinion, 12 in a concurrence and 40 times in the dissents (many of these were to Scalia’s lone dissent).  There is only one Justice now on the Court who was on the Court when Morrison was decided.  But Justice Kennedy took no part in consideration of the case.  Of all the protagonists, only Kennedy and Ted Olson (the Olson in the caption and also counsel for PHH) are still in the picture.

In a nutshell, the majority and the concurrences rely on Morrison v. Olson for the proposition that the “independent” nature of the head of the CFPB is constitutional.  Not unreasonably, Judge Pillard and her majority believe that case is binding and it allows a single administrator insulated from at-will dismissal by the President.  The dissents believe they have distinguished that case and another older precedent, and the combination of insulation from Congress and from the Executive makes the CFPB different and worse from other agencies whose structures have been upheld in the past.  Judge Kavanaugh puts his finger on the shaky foundation upon which the majority builds. In footnote 3 of his dissent he notes:

Recall, moreover, that the independent counsel experiment ended with nearly universal consensus that the experiment had been a mistake and that Justice Scalia had been right back in 1988 to view the independent counsel system as an unwise and unconstitutional departure from historical practice and a serious threat to individual liberty. See Morrison v. Olson, 487 U.S. 654, 699 (1988) (Scalia, J., dissenting) (“this wolf comes as a wolf”); see also Stanford Lawyer 4 (Spring 2015) (quoting Justice Kagan’s statement that Justice Scalia’s dissent in Morrison is “one of the greatest dissents ever written and every year it gets better”). The independent counsel experience strongly counsels against single-Director independent agencies.

Scalia’s famous “called shot” of the trouble such a statute would cause has echoed down the years and is one reason why the Independent Counsel statute was not renewed.  It is also telling that when Morrison was decided the renaissance of originalism, textualism and the focus on separation of powers were in their infancy.  Now, a generation and a half of scholars and judges have grown up reading Scalia’s dissent.  Its most famous passage is:

Frequently an issue of this sort will come before the Court clad, so to speak, in sheep’s clothing: the potential of the asserted principle to effect important change in the equilibrium of power is not immediately evident, and must be discerned by a careful and perceptive analysis. But this wolf comes as a wolf.

I have little doubt this case will be before the Supreme Court before long, and Scalia (and Olson) might at long last be vindicated on the nature of the Executive and on separation of powers in the Constitution.

John J. Vecchione is president and CEO at Cause of Action Institute.

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02/6/2018

An overlooked bipartisan success story in 2017: VA reform

An overlooked bipartisan success story in 2017: VA reform

by John McGlothin | 
From the Grammy Awards to the Pro Bowl, it is an American tradition to start the new year by celebrating last year’s successes. These celebrations may seem indulgent, but they serve a purpose: to remind us about achievements that might otherwise be forgotten. Just like sports or entertainment, the end of the year dominated headlines when it came to what Congress accomplished (or didn’t) in 2017.
The push to pass tax cuts was hectic and eventful, with even Republicans saying a major legislative victory was needed after several attempts to repeal Obamacare failed. Yet there was another legislative victory in 2017, one at least as impressive as tax cuts in almost every way: reform at the U.S. Department of Veterans Affairs. The bill may have passed in another era — last June — but it should not be forgotten.
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