Debt Ceiling Deal Impacts IRS Funding, Resulting in $21B Loss

In a bipartisan agreement aimed at raising the debt ceiling, President Biden and Republican House Speaker Kevin McCarthy have reached a debt ceiling deal that includes significant spending cuts, one of which affects the Internal Revenue Service (IRS).

IRS loses $21B in funding in bipartisan debt-ceiling deal. (Photo: New York Post)

Debt Ceiling Deal Impacts IRS Funding

Under the terms of the debt ceiling deal, the IRS will experience a loss of $21 billion in funding, Fox Business reported.

Last year, the IRS received a substantial influx of $80 billion as part of the Democrats’ Inflation Reduction Act, a healthcare and climate change spending bill signed into law by President Biden in August 2022. This funding was intended to enhance tax compliance among large corporations and wealthy individuals, ultimately reducing the estimated $600 billion tax gap.

However, the recently agreed-upon debt-ceiling deal includes provisions that significantly reduce the funding allocated to the IRS.

As part of the agreement, Republicans demanded an immediate cut of $1.38 billion to the IRS. Furthermore, the bill would reclaim up to $10 billion in each of the next two years.

During an interview on “Fox News,” Speaker McCarthy highlighted the substantial amount of money earmarked for IRS agents by Democrats.

It is worth noting that the IRS, which had around 78,700 employees as of 2021, had previously announced plans to hire nearly 30,000 new employees by the end of fiscal year 2025. This hiring surge included 8,782 enforcement hires and 13,883 taxpayer services hires.

The additional enforcement employees were intended to focus solely on high-earning households, larger partnerships, and companies, as outlined by IRS Commissioner Daniel Werfel.

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Debt Ceiling Deal Faces Criticisms

The decision to reduce IRS funding has drawn criticism from Republicans and other opponents who argue that a stronger IRS could disproportionately impact lower-income Americans.

White House officials have assured the public that the clawback in funding will not adversely affect near-term tax collection efforts.

The debt ceiling, currently standing at approximately $31.4 trillion, represents the legal limit on the total amount of debt the federal government can borrow on behalf of the public, which includes funding for Social Security and Medicare benefits, military salaries, and tax refunds.

Should the debt ceiling not be raised or suspended, the United States would face the prospect of delayed interest or principal payments on its debt.

Earlier this year, the U.S. reached the debt limit, prompting the Treasury Department to initiate a series of measures known as “extraordinary” actions aimed at averting default.

Treasury Secretary Janet Yellen recently warned that the country could run out of funds as early as June 5 if lawmakers fail to raise or suspend the borrowing limit.

The McCarthy-Biden agreement is expected to undergo a vote in the coming week.

Failure to raise or suspend the debt limit would eventually lead to a temporary default on some financial obligations, which could have severe negative implications for the economy. Interest rates would likely increase, and demand for Treasuries would decline. Even the threat of default can raise borrowing costs, according to the Committee for a Responsible Federal Budget.

While the United States has never defaulted on its debt, it came close in 2011 when House Republicans refused to pass a debt ceiling increase, resulting in a one-notch downgrade of the U.S. debt rating by rating agency Standard & Poors.

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