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04/13/2018

Oversight Victory: Tax Regulations Now Subject to OMB Review

In a major win for oversight and constitutional governance, the White House Office of Management and Budget (“OMB”) and the Department of the Treasury have scrapped a decades-old agreement that exempted many IRS tax regulations from independent review and oversight.  In its place, the agencies have set up a new agreement that requires Treasury to submit important tax regulations to OMB’s Office of Information and Regulatory Affairs (“OIRA”) for review pursuant to Executive Order 12,866 (“EO 12,866”) just like nearly every other agency.

This change came after an investigative report from Cause of Action Institute and a sustained campaign over the past few months from supporters of OIRA review.  From a transparency perspective, this agreement is already an improvement because it has been announced publicly, posted on Treasury’s website, and not kept secret for thirty-five years, like the previous agreement.

 

The New Memorandum of Agreement

The new agreement will require Treasury to submit the following categories of tax regulations to OIRA for review:

All three categories are well conceived.  First, one of the main focuses of OIRA review has always been interagency consultation.  And IRS rules can overlap with rules from the Department of Labor and, increasingly in the wake of the Affordable Care Act, the Department of Health and Human Services.  Allowing those and other agencies to weigh in on proposed tax regulations is an appropriate and necessary level of oversight, and can lead to better policymaking.  At the Senate hearing where the agreement was unveiled, Senator Lankford asked Treasury General Counsel Brent McIntosh who will make the determination of whether a new rule is likely to create a conflict with another agency.  McIntosh replied that, under the agreement, Treasury will submit a list of rules to OIRA on a quarterly basis and OIRA will then be in a position to flag rules that may create a conflict.

Second, Treasury will send OIRA tax regulations that raise novel legal or policy issues.  These are exactly the type of rules should not be decided in a vacuum and when independent review from OIRA and others can provide a fresh look at novel questions.  This is also an existing category of rules that are covered by EO 12,866 and so it makes sense to include tax regulations in this existing mandate.

Third, and finally, the new agreement includes tax regulations that are likely to have an annual non-revenue impact on the economy of $100 million or more.  This is the existing threshold for significant regulatory actions for other agencies.  The agreement makes a distinction for the “non-revenue” impact of tax regulations.  This is a commonsense distinction because OIRA review and cost-benefit considerations should be focusing on the distortionary impacts of regulatory choices, not money transferred to the fisc.  This modification of the existing language in EO 12,866 was necessary to fit the existing system to the way tax regulations work.  At the hearing, Senator Lankford asked McIntosh which rules from the 2017 tax cuts may meet this threshold.  McIntosh estimated that rules related to pass-through entities, interest expense deductions, bonus depreciation, section 199A, partnerships under section 512, and section 951A could now be subject to OIRA review.

 

The New MOA Puts OIRA in Control

The new agreement includes an important provision that bars Treasury from rushing rules out the door to the Federal Register before OIRA has signed off.

In order for the president and the White House to properly oversee the Executive Branch, they must be able to control its regulatory actions.  This provision makes it explicit that OIRA gets the final say.

 

Agreement Addresses Concerns about Delay and Expertise

Perhaps the biggest pushback against subjecting tax regulations to the same review that applies to other agencies’ rules was concerns about delay.  The new agreement addresses that issue by putting a 45-day clock on OIRA review and a special 10-business-day expedited review for rules stemming from the 2017 tax cuts.  Responding to concerns about OIRA’s expertise, Administrator Naomi Rao announced that Minnesota Law Professor and tax administration expert Kristin Hickman was joining OIRA as an advisor.  And OMB has been staffing up on other tax experts as well.

 

Concerns about the New Agreement

There is at least one concern about the agreement.  It only applies to “tax regulatory actions,” which the agreement gives the same meaning as “regulatory actions” in EO 12,866.  That definition covers “any substantive action by an agency (normally published in the Federal Register) that promulgates or is expected to lead to the promulgation of a final rule or regulation, including notices of inquiry, advance notices of proposed rulemaking, and notices of proposed rulemaking.”  Noticeably absent from this definition are interpretative rules that are not published in the Federal Register.  The IRS is notorious for trying to claim that its rules are interpretative and do not need to follow the strictures of the Administrative Procedure Act.  (CoA Institute recently filed an amicus brief in a case challenging this behavior.)  It remains to be seen whether the IRS and Treasury will try to assert that interpretative rules do not meet the definition of a “regulatory action” under EO 12,866 and thus do not need to be sent to OIRA for review.  A fair reading of the term “regulatory action” should include interpretative rules, even under the IRS’s improperly broad definition of that term.

But overall a dramatic improvement in the oversight of tax regulations and milestone in the project to end so-called tax exceptionalism and bring IRS under the same administrative law as everyone else.

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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02/14/2018

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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