Editor’s note: Scott Hodge is president emeritus and senior policy adviser at the Tax Foundation, a nonprofit and nonpartisan tax research organization in Washington, DC. The opinions expressed in this commentary are his own. Read more opinion at CNN.
Funding for the Internal Revenue Service proved to be one of the more contentious issues in the recent debt ceiling agreement. Republicans wanted to roll back some or all of the $80 billion in new funding that Democrats enacted in the 2022 Inflation Reduction Act, while Democrats claimed that less funding for tax law enforcement would mean more tax dodging and less revenue for the government. They settled on redirecting $20 billion of the new IRS funding to other domestic programs.
What both parties ignore: The IRS does not need more money for enforcement; it needs fewer things to enforce.
Over the past two decades, both parties have increasingly turned to the tax code to deliver social and economic benefits, converting the IRS into a super-agency responsible for managing nearly 220 “tax expenditure” programs as diverse as the credit for geothermal energy production and the credit for child and dependent care.
Lawmakers have created 64 new tax breaks over the past 20 years alone, according to my own research and analysis.
No agency can competently manage such a vast array of programs. But Congress has set the IRS up for failure because of the way tax expenditures are designed.
Indeed, the IRS inspector general recently reported that the IRS paid out $26 billion in erroneous overpayments to taxpayers who claimed various tax credits, such as the Earned Income Tax Credit, Additional Child Tax Credit and American Opportunity Tax Credit. Overpayments for some of these credits and others were due to mistakes, fraud and insufficient documentation.
Despite the IRS’ best efforts, the amount of mistaken overpayments has grown in recent years, following decades of warnings by government auditors. According to PaymentAccuracy.gov, the government website that tracks the improper payments of federal agencies, the error rate for the Earned Income Tax Credit alone has averaged around 25% since 2004.
In the IRS’ defense, these errors are not necessarily due to gross mismanagement or bad bookkeeping. Unlike traditional programs, such as Medicaid or the Supplemental Nutrition Assistance Program, tax breaks don’t require a lengthy application process or a face-to-face interview with a caseworker to verify a person’s eligibility.
On the contrary, tax credits and deductions are self-validating. The IRS cannot pre-screen people who claim a tax break. Taxpayers determine their own eligibility as they or their tax preparers complete their 1040 tax returns.
Only after the IRS receives a tax return can it try to validate a taxpayer’s eligibility for the credit or deduction. And the only tools the IRS has to verify a claim is to run tax returns through its computer verification software or through an audit. Both tools are costly and burdensome.
Moreover, unlike traditional spending programs, Congress often fails to require the IRS to measure the effectiveness of a tax credit or even collect the necessary data to determine its effectiveness.
Even if the IRS were required to perform such a review, how would the agency determine that the charitable deduction was the deciding factor in a taxpayer’s gift to the local homeless shelter?
What outsiders have found is that many of these tax programs don’t work very well.
For example, nearly 10 million taxpayers claimed some $15 billion in education tax credits in 2022. Education credits, such as the American Opportunity Tax Credit, are intended to make attending college more affordable and accessible by allowing taxpayers to reduce their taxes by up to $2,000 for college expenses. Yet a 2015 National Bureau of Economic Research study found that the credit “generated very little change in college attendance or other college-related outcomes.”
A 2017 study by the IZA Institute of Labor Economics reported that the “key insight from our study and others is that tax credits for college do not affect student outcomes — even when students receive information (on) them.” Education and economics scholars put it bluntly in 2018: “Evidence now clearly shows that these credits have zero effect on college attendance.”
Similarly, an estimated 13.6 million taxpayers claimed more than $27 billion in mortgage interest deductions in 2022. The mortgage interest deduction allows taxpayers who itemize deductions to write off the interest they pay on their home mortgage with the intent to make homeownership more accessible.
Yet 2020 research by the Congressional Research Service suggested that because wealthy taxpayers benefit most from the deduction, it “may have a larger effect on the size of homes purchased than on the decision to become a homeowner.” Another academic study from 2013 determined that the mortgage interest deduction “has no discernible impact on the level of US homeownership.”
The Inflation Reduction Act created or expanded 24 tax credits for green energy programs. Yet when the Government Accountability Office in 2015 examined two credits aimed at encouraging alternative energy production, it reported that since the IRS isn’t required to collect project-level data, “the total generating capacity they supported is unknown.”
In two recent reports, GAO complained about the lack of data to judge the effectiveness of the New Markets Tax Credit, or NMTC, and “opportunity zones,” tax programs intended to promote investment in low-income areas.
GAO found it was “difficult to establish causal links between NMTC-related financing and these reported project outcomes.” Another GAO report simply declared “there are insufficient data available to evaluate (opportunity zone) performance, including outcomes.”
Both parties have learned that “cutting taxes” through targeted tax breaks is more broadly popular than creating new spending programs. But the IRS’ job should be to collect taxes, not deliver benefits. It has all the money and auditors it needs to do that; it just needs a simpler tax code.
The path to a simpler tax code would start by eliminating many of these tax programs altogether through fundamental tax reform, or at least as a means of reducing the national debt.