Republican Conflict on the IRS Might Kill Infrastructure Deal

Tea Party’s over?
Photo: Tom Williams/CQ-Roll Call, Inc via Getty Imag

The road to a bipartisan infrastructure deal is littered with potholes — and the GOP’s fear and loathing of the IRS might be the biggest of them all.

Late last month, five (relatively) moderate Senate Republicans reached a bargain on infrastructure spending with five of their Democratic counterparts. A proposed increase in the IRS budget cemented this agreement. Throughout negotiations over the bipartisan package, “pay fors” had been the primary stumbling block. With the GOP religiously opposed to raising taxes on the wealthy, and Democrats disinclined to raise taxes on anyone else, mutually agreeable sources of revenue were few and far between.

Then negotiators found a way to increase tax revenue without raising taxes: Every dollar invested in the agency’s emaciated enforcement capacity would lift many more from the pockets of tax cheats. Thus, the bipartisan group’s proposed $40 billion expansion of the IRS budget could plausibly yield $140 billion in revenue — a net return large enough to offset nearly one-fifth of their deal’s $579 billion in new infrastructure spending.

But funding the tax police is a bitter pill for the right. Conservatives are not only hostile to the IRS’s core mission, they also consider the agency a serial persecutor of their movement. In recent days, various right-wing nonprofits — including the Koch-backed FreedomWorks — have begun lobbying Mitch McConnell to whip votes against any bipartisan agreement that includes additional funding for the IRS. In order to pass the Senate, the bipartisan deal will need to gain at least five more Republican supporters than it currently boasts.

To appreciate how heavy a lift that will be, it helps to understand the right’s official and unofficial grievances with the IRS, and the real and imaginary bases for those complaints. Here’s how the Republican base came to see America’s tax agency as a proto-totalitarian instrument of social control.

Few Republicans will publicly endorse anemic tax enforcement as an end in itself. Rather, conservatives typically couch their opposition to IRS funding in concerns about the agency’s corruption. Specifically, they argue that the IRS routinely commits politically motivated abuses of power. This week, Iowa senator Chuck Grassley alluded to such concerns when he suggested that additional funding for the IRS might “come at the expense of taxpayer rights.” The Coalition to Protect American Workers, a conservative group financed by capitalists opposed to Biden’s agenda, portrays the IRS as an army of black-tied, bespectacled clones descending on America’s God-fearing small businesses, in an attack ad as Orwellian as the organization’s own name.

Photo: CPAW

The American right has plenty of persecutory fantasies that have no basis in fact. But its paranoia about the IRS draws strength from one genuine historical truth: At various points in U.S. history, federal tax-enforcement agencies have been used as political weapons.

In the 1930s, Franklin Delano Roosevelt ordered the Treasury’s tax-enforcement branch to engineer charges against Andrew Mellon, the former Republican Treasury secretary and millionaire industrialist. In the 1960s, the IRS helped end the political career of Senator Edward V. Long, who had earned the agency’s ire by holding hearings on its alleged misuse of wiretaps in criminal investigations. According to the investigative reporter William Lambert, an IRS agent leaked him word of a suspicious payment Long had received from an associate of Jimmy Hoffa. After Lambert published a story off that tip — and Long subsequently lost renomination — Lambert says he received a call from then-IRS commissioner Sheldon S. Cohen, offering him the agency’s “congratulations.” In the 1970s, of course, Richard Nixon directed the IRS to hound political organizations he deemed “subversive.”

Recent decades have seen fewer instances of documented, top-down corruption. But the tax code’s confounding rules regarding the activities of nonprofits has long invited both politically motivated enforcement actions, and suspicions of the same. Under congressional statute, civic organizations that are “operated exclusively for the promotion of social welfare” — technically known as 501(c)(4) groups — are exempt from federal taxation. Initially, this was understood to prohibit such groups from engaging in political activity, if they wished to maintain their tax-exempt status. But subsequent Treasury Department regulations effectively rewrote the law; under its guidance, a 501(c)(4) can engage in political activity so long as it is “operated primarily for the purpose of bringing about civic betterments and social improvements.”

The foundational distinction in this law — between political advocacy and the promotion of social welfare — is logically unsustainable. The impact of government policy on social outcomes dwarves that of independent civic organizations; no charity could have possibly supplied the needy with as much aid as the CARES Act did last year. Ultimately, there is no apolitical definition of “social welfare,” and promoting most conceptions of the general good will necessarily involve political activity. Meanwhile, discerning whether an entity is primarily a “civic betterment” group, which supplements its apolitical work with lobbying and campaign activities — or primarily a political group with a secondary interest in civic betterment — is an inherently tricky task. When a left- or right-leaning group is given or denied tax-exempt status, suspicions of political persecution are liable to arise.

In 1989 — eight years into Republican domination of the executive branch — it was often liberals who questioned the IRS’s political neutrality. In an exposé for The New York Times Magazine that year, reporter David Burnham wrote that the agency was “run by a small cadre of senior civil servants” who “have adopted the IRS’s generally conservative view of the world.” In the piece, Burnham recounts a seemingly right-wing IRS agent’s indignant response to the Minnesota Association for the Improvement of Science Education’s application for tax-exempt status. The liberal group had disclosed that part of its mission was to promote the teaching of evolution in schools; in response an agent sent a letter demanding to know, “What gives you the standing or the prerogative to deem certain version[s] of the origin of life on Earth as pseudo-scientific? Why are you opposed to permitting the granting of equal time in school curricula to the teaching of the theory of creationism?” Burnham goes on to suggest that, under Reagan’s watch, the IRS turned a blind eye to the pro-life political activities of the Catholic Church, and thereby “provided the church with a substantial illegal subsidy for its political campaigns.”

All of which is to say: Just because conservatives are paranoid, doesn’t mean that the IRS has never been out to get them (or progressives, for that matter).

The conservative movement does not actually have a principled opposition to funding law-enforcement agencies that have ever suppressed dissent. The IRS’s record is not devoid of corruption. But it’s considerably cleaner than the FBI’s, or those of most of America’s major police departments.

The right’s fixation on IRS malfeasance reflects its opposition to the agency’s core mission. For the bulk of its existence, the conservative movement’s leadership has disdained income taxation in general, and progressive taxation in particular. This antipathy is implicit in the modern GOP’s unwavering commitment to lowering federal taxes on the wealthy, irrespective of the nation’s contemporary tax rates, budget deficit, or national spending. And it is explicit in the advocacy of influential right-wing activists, such as Americans for Tax Reform founder Grover Norquist and Hillsdale College president Larry Arnn, who have called for repealing the 16th Amendment and making federal income taxes unconstitutional. If one regards progressive taxation as a form of theft, then the IRS is an inherently corrupt institution. And Republicans have treated it as such.

Upon taking the House in 2011, Republicans set about slashing the IRS’s budget, which fell from $14 billion that year to $11.5 billion in 2020. As a result, the agency’s number of staffers declined by 22 percent, while its enforcement division cut its payroll by 30 percent — even as the number of individual tax returns in the U.S. grew by more than 7 percent. All of which redounded to the benefit of the one percent.

Between 2010 and 2018, the audit rate on returns with more than $1 million in income dropped by 63 percent. In the former year, nearly all corporations worth over $20 billion were subject to audits; in the latter year, only half were. White-collar crime went rampant. The tax gap — the difference between what Americans owe to the federal government and what they pay — swelled to an estimated $441 billion in 2013, and $584 billion in 2019. The current IRS commissioner, Chuck Rettig, believes that these were underestimates, and that the current tax gap is closer to $1 trillion.

It’s worth noting that no great scandal initiated the GOP’s defunding of the tax police. Rather, House Republicans pursued downsizing the IRS as an end in itself. They saw that their budget cuts were increasing the deficit by reducing tax collections, and then pushed for yet more budget cuts anyway.

Today, Republicans portray their hostility toward the IRS as a product of the agency’s scandals. But in recent history, the agency’s scandals have largely been products of the GOP’s hostility toward the IRS.

This was true of the IRS controversy orchestrated by Republican senator William Roth in 1998. What came to be known as the “Roth Hearings” purported to expose endemic abuses of power at the IRS — and endeavored to do so with cinematic flair. As the liberal commentator Kevin Drum recounts:

The hearings were deliberately dramatic: Roth held them in a committee room designed to block electronic eavesdropping and had guards search everyone before they entered the chamber. IRS employees called as witnesses were blocked by black curtains and had their voices electronically altered, like mobsters afraid of being murdered in their sleep.

The testimony was equally dramatic: IRS agents, they said, routinely made false accusations against people, busted into people’s homes and waved guns in their faces, and once even forced a girl caught in a raid to change her clothes while agents watched.

The hearings ultimately failed to substantiate any of these specific claims, and a subsequent investigation produced no evidence of systematic abuses. But that was scarcely the point. As David K. Johnston contemporaneously reported for the New York Times:

[T]he hearings were just another step in a much larger strategy by Republicans in Congress who have vowed to replace the income-tax system with a new tax code.

The Republicans want nothing less than ”to pull the current income-tax code out by its roots and throw it away so it can never grow back,” Representative Bill Archer of Texas regularly tells audiences. Mr. Archer is the chairman of the Ways and Means Committee, where tax bills originate.

In March, Senator Tim Hutchinson, Republican of Arkansas, introduced a bill, which quickly found many co-sponsors, that would repeal the Internal Revenue Code beginning in 2002.

In the end, William Roth’s theatrical production succeeded in building momentum for legislation that cut the IRS’s budget and restricted its capacity to target high earners.

Conservatives produced the defining IRS pseudo-scandal of our era — the Obama administration’s IRS targeting controversy — through both direct and indirect means.

They did so indirectly (and unwittingly) by simultaneously gutting U.S. campaign-finance law and the IRS’s budget. The conservative Supreme Court majority’s ruling in Citizens United v. Federal Election Commission sanctioned nearly unlimited political spending by nonprofit groups. As a result, interest in forming tax-exempt social-welfare organizations — that could blanket the airwaves in tacit election propaganda (so long as they didn’t use tax-deductible donations to finance their political campaigns, and “primarily” focused on civic betterment) — skyrocketed. Between 2010 and 2012, the number of annual applications the IRS received from aspiring 501(c)(4) groups more than doubled. Over the same period, as we’ve seen, the IRS’s budget was cut.

Tasked with assessing the legitimacy of all these groups’ operations, on a shoestring budget, the IRS resorted to a kind of profiling: The agency established a “Be On the Look Out” (or “BOLO”) list of names that would earn a prospective organization closer scrutiny. Among these were words heavily associated with conservative political groups (which had already earned a reputation for flouting federal law) such as “9/12,” “Tea Party,” and “Patriots.” But the BOLO list also included words associated with left-wing political groups, including “progressive,” “occupy,” “medical marijuana,” and “occupied territory advocacy.” Groups with these words in their names were often subjected to an exhaustingly thorough and/or maddeningly slow review process. While awaiting IRS approval, such groups were free to engage in election activity. But they had to do so under the shadow of legal ambiguity.

When conservative organizations found themselves subjected to thorough scrutiny — or else, forced to wait weeks for the agency to process their applications — they often concluded that Barack Obama had personally ordered the IRS to violate their First Amendment rights. The congressional GOP ordered the Treasury Department’s inspector general to audit the IRS’s screening of conservative political nonprofits.

This yielded an IG report that criticized the IRS for applying closer scrutiny to political groups on the basis of “their names or policy positions instead of indications of potential political campaign intervention.” As noted above, the IRS’s reliance on the inappropriate criteria of “names” was partially a product of its limited resources and multiplying oversight responsibilities. Given this reality, one logical interpretation of the IG’s findings would have been that the IRS needed a larger budget.

But Republicans drew a less logical conclusion — namely, that the IRS had singled out conservatives for special scrutiny. The IG report could not substantiate this claim, since it did not look into the agency’s treatment of other ideological factions. But the Obama administration and mainstream press affirmed the right’s allegation, anyway. The president himself condemned the ostensible, disproportionate scrutiny of conservative groups, top IRS officials resigned amid a blitz of bad headlines. These gestures of guilt lodged the IRS targeting scandal so firmly in the right’s canonical account of Obama-era tyranny, it has remained there — even as its foundational premises have been eviscerated.

In 2017, a second Treasury Department IG report found that the IRS had routinely used keyword targeting against both liberal and conservative organizations between 2004 and 2013. This finding established that (1) conservative groups had not been singled out in the years immediately following Citizens United, and (2) IRS keyword targeting was not an Obama-era innovation, let alone one cooked up by a Democratic administration hellbent on persecuting its adversaries.

It is true that the IRS subjected a larger number of right-wing groups to scrutiny than it did liberal or centrist ones. But that only constitutes evidence of bias if the rate of illegal activity among nonprofits of all ideological factions were uniform. And there’s no reason to believe that this was the case. All of the 501(c)(4) applications that were set aside for scrutiny indicated — or openly declared — plans for engaging in illegal political activity. And, according to the analysis of David K. Johnston, conservative nonprofits happened to declare such intentions more often than liberal ones.

Nevertheless, this week, a Wall Street Journal op-ed cited the IRS targeting scandal as a reason for Republicans to defund “Joe Biden’s IRS,” describing the nonevent as a “sobering lesson in how one of Washington’s most powerful agencies can be weaponized against political opponents.”

Whatever one makes of the IRS’s real and imagined scandals, they don’t add up to much of a case for serially underfunding tax enforcement in the United States. But the specter of crypto-communist taxmen coming for every faithful Christian (and/or Mammonite) in the country still haunts the GOP base. And that makes voting to increase the IRS’s budget by $40 billion a dicey proposition for Republican senators.

Which in turn makes the bipartisan infrastructure bill’s passage a risky bet. Moderate senators already spent months searching under the tax code’s figurative couch cushions for mutually agreeable forms of revenue. It’s possible that this lack of alternatives will ultimately lead ten Senate Republicans to back an IRS budget increase. After all, if the bipartisan infrastructure agreement falls through, it will likely be replaced by a larger, more progressive, Democrats-only infrastructure bill — replete with Biden’s preferred, $80 billion increase in IRS funding.

But if enforcing existing tax law is off the table, then the rest of the deal is likely headed for the scrap heap.