Speed Reads

Law of unintended consequences

How the Democrats' push to make the IRS more efficient accelerated the debt limit crisis

President Biden and congressional Democrats gave the Internal Revenue Service an $80 billion infusion in last year's Inflation Reduction Act to modernize the agency and hire more workers to process returns, cut down on wealthy tax avoidance, and improve customer service. House Republicans tried to claw back that money in the first bill passed by their new majority. Now both parties are scrambling to find a way out of a debt-ceiling impasse before June, when the Treasury Department predicts the U.S. will start defaulting on its financial obligations. 

It turns out, Politico reports, that one "surprising culprit behind the sooner-than-anticipated debt-limit deadline" is the "better IRS service" this year, due in large part to the Democrats' $80 billion in extra funding. The IRS has a much smaller backlog of tax returns to work through this year — about half the 5.2 million piled up at this time last year — so there are fewer checks left to be deposited in the federal coffers. 

The fewer payments processed in May, "in combination with the less-than-expected receipts through April, means that the Treasury's extraordinary measures will be exhausted sooner than we previously projected," by early June rather than July or August,  the nonpartisan Congressional Budget Office told lawmakers this week.

Better IRS customer service isn't the only reason the deb ceiling is looming faster than anticipated. Capital gains taxes are lower than expected because of turmoil in the banking industry, and the IRS has received 1.3 percent fewer returns overall this year compared with 2022, Politico reports. "That could partly be because the department gave people in California and other states hit by natural disasters until October to file." 

Even if not many people deferred filing, "there are lots of wealthy people in California, in particular, and there is a financial incentive for those who owe to delay paying as long as possible," Politico adds. In fact, "it's not uncommon for wealthy people who owe to not only file very late in the tax season but also do it on paper, rather than electronically, because that takes the IRS longer to process, which means the taxpayers' money can sit in an account longer collecting interest." Wealthy people also have the most to lose if the U.S. defaults on its debt.