Tax regulations

How OIRA Should Review Treasury Tax Regulations

In April 2018, the US Treasury and the Office of Management and Budget (OMB) agreed to a new process under which the OMB would review tax regulations before they are released. Under this agreement, the analytical requirements imposed on economically significant non-tax regulations apply to many more tax regulations than in the past. However, neither the OMB nor the Treasury have issued an official statement on their approach to the economic analysis of tax regulations. Further, applying the OMB’s Standard Guidelines for Regulatory Analysis to tax regulations would distort the regulatory process against increasing revenue and stopping abuse, and undermine the effective administration of tax law.

In “A Framework for Economic Analysis of Tax Regulations” (PDF), Greg Leiserson of the Washington Center for Equitable Growth and Brookings Senior Fellow Adam Looney describe an alternative framework for the economic analysis of tax regulations that can help the Treasury and the IRS in the development of effective regulation. The resulting analysis would also provide legislators and the public with relevant information to assess the economic merits of tax regulations.

The authors argue that the Treasury and the IRS should conduct formal economic analysis of regulations in two cases. First, for regulations that implement recent tax legislation, agencies should perform an analysis to determine whether they have substantial discretion in designing the regulation and whether different ways of doing so would vary significantly in their economic effects. . Second, for regulations unrelated to recent legislation, agencies should perform an analysis to determine whether the regulation would have significant economic effects relative to current practice.

The economic analysis conducted in these cases should focus on the revenues generated and the economic burden placed on the public as a result of the agencies exercising discretion or reapplying existing authority. The revenue generated and the burden imposed reflect the fundamental tax trade-off and thus determine the costs and benefits of regulation. However, the analysis should not attempt to quantify the net benefit or net cost of regulation as this would require agencies to make controversial assumptions about the social value of revenues and the appropriate distribution of the tax burden. The Treasury’s Office of Fiscal Analysis is well equipped to provide revenue and expense estimates, as they can be built from analyzes the Office already produces: revenue estimates, distribution analyzes and cost estimates of compliance.

The authors conclude that a greater role for economic analysis has the potential to improve tax regulation, but experience since the April agreement raises significant concerns. The new review process delayed the release of the Tax Act 2017 implementation guidance and increased the resources needed to complete each regulatory project. However, there is little evidence to suggest that he improved the resulting regulations. If this continues to be the case, it raises a more fundamental question of whether the new review process should be continued. In the absence of improvements, a future administration might consider returning to the more limited scrutiny of tax regulations that existed before the recent agreement between the Treasury and the OMB.

Download the full report here.