Tax Day focus: record-breaking kicker + the need for a well-funded IRS

With tax season coming to an end, it’s a good moment to discuss the vital role that our tax system plays in our lives. At its best, the tax system makes the economy work better for everyone. At its worst, it deepens existing economic injustices.

In this episode, we focus on two aspects of the tax system.  First, we discuss Oregon’s record-breaking kicker, which is sending massive tax rebates to the rich, while giving little or nothing to those struggling the most. OCPP’s Daniel Hauser explains the policy and discusses how to make the kicker work better for Oregonians.

In the second half of the show, we focus on the importance of having a well-funded Internal Revenue Service (IRS). Joe Hughes from the Institute on Taxation and Economic Policy discusses the long-term erosion of the agency’s budget, as well as recent efforts to turn things around.

Transcript

Tax season is coming to an end. So it’s a good moment to discuss the vital role that our tax system plays in our lives. At its best, the tax system makes the economy work better for everyone. At its worst, it deepens existing economic injustices.

In this episode of Policy for the People, we’re talking about our tax system, and two aspects in particular.

In the second half of the show, we focus on the importance of having a well-funded Internal Revenue Service (IRS), the nation’s agency responsible for collecting and administering the tax system. Joe Hughes from the Institute on Taxation and Economic Policy discusses the long-term erosion of the agency’s budget, as well as recent efforts to turn things around that are beginning to pay off.

But we begin by examining Oregon’s kicker rebate. The largest kicker rebate ever, totaling $5.6 billion, is being paid out to Oregon tax filers. But as we hear from Daniel Hauser, Deputy Director of the Oregon Center for Public Policy, the rich are getting massive rebates, while those struggling the most to get by are getting little or nothing. Is there a way to make Oregon’s kicker rebate work better for Oregonians?

Stay tuned.

Juan Carlos Ordonez (host): Daniel, as we're recording this, Tax Day is just around the corner. And for those who have prepared their Oregon tax returns already, they may have noticed line 38, the place where tax filers can claim their portion of the Oregon kicker rebate. Can you give us a quick explanation as to what the kicker is and why it's being talked about so much this tax season? 

Daniel Hauser: So the kicker is a particularly hot topic this time of year, especially because it's the biggest kicker Oregon has ever seen. $5.6 billion is on track to go back out to tax filers this year. And it's the largest in percentage terms, in dollar terms, it's more than double our largest bigger kicker. I mean, it is just far and away a record-breaking kicker.

And to the first half of your question, what is the kicker? Every state budget process requires the state economists to forecast how much revenue will come into the state coffers over the next two years, over that next budget period. And if the actual revenue brought in is 2% or more over what the state economists forecasted, then every cent over their guess is returned through a kicker rebate, not just the amount that's over that 2% threshold. And then the kicker – that amount over what they guessed two years prior – is distributed back out to tax filers based on their tax liability for the prior tax year after deducting taxes paid to other states. And it's a little bit more complicated than that, but that's largely how it's calculated.

And to be clear, this is an impossible task we're asking the state economists to do. I mean, guessing what the global economy, the national economy and then Oregon's economy will do over the next two years is impossible. And not only do they have to guess these broad economic trends, but they have to very specifically figure out how much revenue is coming in through personal income taxes. How many people got laid off? How many people got a raise? What did the stock market do? It's an impossible task. And if they were able to do it perfectly, they would not be working for the state economist’s office. They'd be billionaires. They would be the most successful financial forecasters in world history. 

Juan Carlos: What is your assessment of the kicker as public policy? How well is it serving the interests of Oregonians? 

Daniel: The kicker fails about any test you could imagine for defining good public policy. It is absolutely something that makes budgeting more challenging for the state by causing large swings in resources available for investing and families investing in communities. It's unpredictable. It really just undermines the interest of all Oregonians.

Let me give you an example of why this is the case. If we were able to invest the kicker every single budget period over the last decade, we'd have $10 billion or more that we could have spent on investing in the behavioral health system in Oregon, on expanding access to affordable housing or making child care more affordable.

We could have done so much to improve the lives of people in our communities and to address the biggest challenges confronting the state. And instead, it's just kind of gone out sporadically. Every couple of years, we have a kicker of some size. And it's really undermined the future for all Oregonians. 

Juan Carlos: What about how the kicker impacts economic inequality? And of course, we're living at a time of vast income inequality. How is the kicker performing in that sense? 

Daniel Hauser: The kicker absolutely deepens and worsens economic inequality. The personal income tax system is one of our very most progressive taxes, right? The personal income tax system in Oregon does tax the richest people more than the poorest people. And that helps address the really gaping economic inequality that exists in our state.

But what the kicker does is it cuts that back significantly. So if you consider the current kicker that's going out, it's around 45% of personal income tax revenue that is being kicked back out and returned to tax filers. So that means that of our biggest, most progressive tax in Oregon, we're cutting it in almost half. Because of the kicker.

And that's really undermining the state's efforts to address income inequality. And to give you an idea of just how unequal the district the kicker is this time around. The median Oregonian, a typical Oregonian in the middle – Iif you were to line up every Oregonian, the one who made the absolute middle right the 50th in a line of 100 Oregonians, their kicker is going to be just short of $1,000.

The top 1% – the very richest one in 100: the one person at the end of that 100 person line I described their average kicker is forecast to be about $45,000, almost $45,000. And if you were to look at the 20 Oregonians standing at the poorest side of that line, the bottom 20% of Oregonians, their average kicker is $60. You know, maybe two trips to Taco Bell if you only have one kid. Not very much money compared to $45,000 for the richest 1% of Oregonians. 

And it actually gets worse at the extremes. The richest 100 Oregonians, the 100 Oregonians who made the most in that single year, are forecasted to get average kickers of more than $800,000 – $800,000 going to each person on average that are the richest 100 Oregonians.

It's so mind boggling to consider that we're giving the people struggling most to survive $60, and the people who already have four homes and a yacht $800,000. 

Juan Carlos: And what about its impact on racial inequality? We know that, of course, there's vast inequality along racial lines because of a whole host of historical reasons, public policy choices past and present. So are we seeing an impact along racial lines from the kicker?

Daniel Hauser: Yes. We recently came out with analysis that showed that the kicker does deepen racial inequality in Oregon. White Oregonians get a disproportionate share of their kicker relative to their share of the population. And this reflects, as you noted, generations of policies and structures that help set white families, on average, in a direction where they have more income and more wealth and families of color have fewer economic opportunities over the past hundreds of years.

And so one way to put this in perspective is to consider just the richest 20,000 white Oregonians. And these are, you know, the richest white Oregonians who make more than $500,000 in a single year. They received a bigger combined kicker than every non-white Oregonians combined, which is more than 400,000 Oregonians. We have 20,000 of the richest white Oregonians getting a bigger, combined kicker, than 400,000 Oregonians of color combined.

And this really goes to show this intersection of race and income and how the kicker really shines a bright light on how bad that can be and how deeply that can cause greater economic harm in our communities. 

Juan Carlos: And what about differences by geography? How is the kicker distributed across the state? 

Daniel Hauser: So we are currently working at the Oregon Center for Public Policy on an analysis that looks into the geographic breakdown of the kicker. And the early feedback shows – this is based on Department of Revenue data – that the kicker worsens geographic inequality in the state. It worsens the urban-rural divide economically. And this disparity is largely, although not exclusively, a reflection of these higher incomes. And I think it aligns well with the discussions around the income and racial inequalities in the kicker. So consider that the average kickers in the Portland Metro counties, right, Multnomah, Washington, Clackamas are all in the top five highest kickers of any county in the state, and only Deschutes and Hood River counties join them in that top five tier.

And all but one of the ten counties with a lowest average kicker are considered rural, and about a third of counties had average kickers that were less than half of the highest average in Clackamas County. So put another way, many of the Oregonians living in rural communities get kickers that are but a fraction of the average kicker in urban communities.

And so I think the data is clear that the kicker exacerbates and worsens the urban-rural economic divide in Oregon. 

Juan Carlos: Defenders of the kicker often say that, you know, the reason why the rich are getting huge kicker rebates while low income folks get peanuts simply reflects the reality that the rich pay a lot more in income taxes. And because the kicker formula is proportional to taxes paid, that's why they get those big tax rebates.

But what do you make of that argument?

Daniel Hauser: Well, it's worth noting, first, that many low income Oregonians don't even get peanuts. They get nothing from the kicker. Consider an Oregonian who survives purely on Social Security income, Right. The only income they have to pay their rent to afford dinner to pay for car insurance is from Social Security. These are fixed income families that are struggling to survive. 

So at the other end of the income spectrum, we have Oregonians that are getting massive kickers. But the reason for this is because of the gaping income inequality that Oregon has. We've seen over recent decades inequality soar. In Oregon in 2021, it would take more than 180 years for the typical working Oregonian to make as much as just the richest 0.1% – one in 1000 – made in a single year.

And the rich did not become many times more hardworking than than other Oregonians. They just became many times better at capturing the profits and value in our economy. And so when the kicker gives these folks a 40% plus tax cut, which is the estimate for this current kicker, it's really layering on and another enormous handout to those who are already doing better than ever, who are already benefiting from the extreme income inequality in Oregon.

Juan Carlos: So what do you think should be done with the kicker? Do you think Oregon should do away with it, or is there a way to reform it to make it better serve the needs of Oregonians? 

I think there are many options that could be considered for investing the kicker in better ways in our communities. You know, eliminating the kicker and providing those resources to be invested as the legislature sees fit, as those revenues otherwise would if the state economists just hadn't missed estimated revenues two years ago, I think that would be great. 

But that said, I think there is another reform that could be more politically palatable for many Oregonians, which would be the Working Families Kicker. And this is a policy that would result in most Oregonians getting a bigger kicker. And how it would work is that every Oregonian would get the same kicker right.

The Working Families Kicker would ensure that there's an equal kicker for all Oregonians. And so for our current kicker, the one that's going out this tax season right now, the average Oregonian would get more than double their current rebate. Right. They would see it go from around a thousand to around $2,000. Low-income Oregonians that I noted earlier are going to be getting $60 on average out of their kicker would also be getting more than $2,000.

And so the Working Families Kicker would be a really meaningful way to still keep the kicker in place, with all its existing flaws, but would make it to where the impact on families, the impact on economic insecurity would be much more significant. It wouldn't just be giving the richest 100 Oregonians hundreds of thousands of dollars. It would instead really be providing more economic security to low-income families across our state.

Juan Carlos: So what would need to happen to make the Working Families Kicker a reality?

Daniel Hauser: I think what we would really need is to see a movement. We need to see Oregonians across the political spectrum appreciating that if we want to address income inequality, if we want to address racial inequality, if we want to limit the urban rural-divide in Oregon, that we need to look at that kicker as a key way of accomplishing these goals.

And we need to talk to our neighbors, talk to our family. And if we can get enough Oregonians working on this, thinking about this, talking about this, then we can reach a point where the Oregon Constitution can be changed and the Oregon Constitution can be made to include the Working Families Kicker. It can be a document that actually improves Oregonians lives instead of something today that just sends $5.6 billion disproportionately out to the richest households in our communities.

Juan Carlos: That was Daniel Hauser of the Oregon Center for Public Policy discussing Oregon's kicker rebate. And now our look at tax policy pivots towards Washington, D.C.. For over a decade, Congress has allowed funding for the Internal Revenue Service to wither to the detriment of ordinary folks and to the benefit of wealthy tax cheats, according to Joe Hughes, a Federal Policy Analyst with the Institute on Taxation and Economic Policy.

But new funding for the agency has begun to turn things around, even as the threat of cuts to the IRS budget remains. Here is my conversation with Joe Hughes. 

Joe, welcome to Policy for the People. 

Joe Hughes: Thank you so much for having me. 

Juan Carlos: So, Joe, in a recent article that you wrote, you point out that just a few days ago, President Biden signed legislation to keep the government open. And one of the items in that piece of legislation, one of the things demanded by congressional Republicans, was a cut of $20 billion in funding to the IRS, the Internal Revenue Service. And we're going to get into the details of the ups and downs of funding for the agency that collects taxes for the nation. But let me start by asking, why is this issue, the level of funding for the IRS, something that Oregonians should care about?

Joe: People should care about the IRS funding because the IRS is one of our government's most essential agencies to actually performing the duties of a government. Most people don't really love paying taxes, of course, but people do generally like the things that taxes pay for, like schools, highways, health services, income support for the elderly and disabled, food and drug safety, all of these things.

If you care about them, then you need a revenue agency to protect them. And you also need a revenue agency that is appropriately staffed, has up-to-date technology, and has the capability to reduce the taxpayer's burden in terms of the time and cost it takes to file a tax return. And on all of those fronts, in terms of collecting the amount of revenue that it's supposed to collect and making life easier for most taxpayers, the IRS was simply failing for the past decade due to repeated budget cuts.

Juan Carlos: Can you walk us through what's been happening to the budget of the IRS in recent years as well as over the longer term? 

Joe: So most recently, the Inflation Reduction Act, the IRA that was signed at the end of 2022, gave the agency this huge increase in funding, about $80 billion in funds that was supposed to be used over the next ten years to modernize the agency and increase its workforce.

And why that was important was because starting in the 2010s, the agency's funding was repeatedly cut. This was part of the broader austerity campaign of the Great Recession era, where essentially every economic woe that you could imagine was blamed on government spending. But if the idea was to close the deficit by cutting IRS funding, well, the funding cuts did just the opposite.

You know, in general, with most agencies, it's true that if you cut the agency's funding, you're going to have some decline in the federal deficit. But there are a select few agencies that bring in more money than they spend. Namely, the IRS. That's a big one, right? It is the revenue agency that our federal government depends on.

So between 2010 and 2021, the year before the new funding was allocated under the IRA, the agency's funding had been cut by a fifth in inflation adjusted dollars. Meanwhile, the number of tax returns was rising all along and the number of complex tax returns that are really difficult for the IRS to audit, like big partnerships or returns for wealthy people who can afford big accounting and legal firms, grew even quicker. The number of tax returns from people making more than half-a-million dollars grew by 70% between 2011 and 2019. But at the same time, the types of technology like AI or machine learning that the agency could have been leveraging to help sift through returns and identify the most suspicious ones – that technology was exploding, but the agency had no capacity to develop new business systems. So they were basically still using the same technology and procedures that they had been using in the early 2000s or in some cases as far back as the sixties or seventies.

Juan Carlos: What does the eroding level of funding mean for the ability of the IRS to do its job in terms of collecting taxes? 

Joe: The drop in funding meant that the agency was unable to serve its mission, which is to collect revenue and make it simple for regular taxpayers to file their taxes simply. 

Most people have fairly normal income. They have W-2 income. They, maybe, have a little bit of interest income or Social Security income. And that's all already reported to the IRS. So it's pretty hard to cheat on your taxes. And most people don't want to get involved in it. 

It is much easier for big companies and very wealthy people who can afford armies of accountants and lawyers to find ways to hide their true income from the IRS. And the level of audit rates on those people dropped considerably. I mentioned earlier that the number of people making more than half-a-million grew by 70% between 2011 and 2019. The audit rate on those same people, that same group, dropped by 76%. And for regular taxpayers, the people who are trying to file accurate, timely tax returns, we found ourselves dealing with an agency that is just unable to meet the needs of the public in 2022.

The Washington Post did this really great report where they went to IRS processing facilities and looked at what the agency was actually dealing with. And the Austin, Texas facility was one of the highlights of this article that The Washington Post did, where they found that the the employees there in the facilities were so strained that its entire cafeteria had been taken over to become this impromptu document processing center.

So the agency wasn't able to meet calls, it wasn't able to respond to letters, it wasn't able to issue timely tax refunds. And it definitely wasn't able to ensure that the very well off or that big, complex businesses were paying the taxes that they actually owed. 

Juan Carlos: Do we know how much money, how much in taxes, was not being collected by the IRS due to its lack of resources?

Joe: Well, we know that the tax gap – that's the amount of taxes that is legally owed under existing tax rules, but not collected – has grown to about $600 billion every year. And more than half of that comes from the top 5% of taxpayers and almost a third of it from just the top 1%. When the additional funding was passed, the $80 billion that was passed in 2022 to supplement the IRS and bring it into the 21st century, the estimate at the time was that that would increase revenues by about $200 billion. So $80 billion in spending, $200 billion in additional revenue from taxes that would otherwise go uncollected. That's the official estimate from the Congressional Budget Office. But I'll point out that others have said that that estimate is actually quite low because CBO doesn't consider behavioral effects, among other things.

That is when people know that the IRS is more likely to audit them, has better resources. They're more likely to file their taxes correctly in the first place. The researchers at the Treasury Department, for example, have said that the actual revenue increase that we should see from the additional funding is probably more like $400 billion, twice the estimate from CBO.

Juan Carlos: So in other words, the study by Treasury found that increasing the budget of the IRS more than pays for itself, in that it allows the agency to collect more in taxes owed by wealthy people who are not paying what they owe. Is that basically the point of the study? 

Joe: That's exactly right. And that's not just the Treasury's finding. That is every serious piece of research that has been done on this has found that increasing the IRS funding increase is more than pays for itself because of how much it increases revenues from people who owe taxes. Again, I want to reiterate that these are people who legally owe taxes but are not paying them or making efforts to hide their true income from the IRS.

Juan Carlos: Those in Congress who oppose increased funding for the IRS or who demand cuts to funding for the IRS, what is driving that push, given that giving the agency increased funding will more than pay for itself? 

Joe: So I can't speculate what's going on inside the heads of these lawmakers who want to cut government funding. It's possible that some of them just genuinely don't believe any of the research that is coming out on IRS funding.

I think it's more likely that it's one of two cases. One is that there are a lot of conservative lawmakers who genuinely don't want the public to trust the tax system. It makes it harder for them to pursue their mission of cutting taxes for the wealthy, mostly, and big corporations, and also to cut government funding. If people feel like they have an easy time dealing with the IRS. So it helps their case and it helps their electoral results to make it very difficult for people to deal with the government intentionally. And then the other reason is that there is a lot of money to be made by a lot of big corporate and individual donors from having an agency that is unable to sufficiently audit high income taxpayers and big complex multinational businesses.

Juan Carlos: Joe, any final thoughts you would like to share with us regarding the issue of providing the IRS the funds that it needs to carry out its job? 

Joe: I think that people need to remember that this is not just about increasing tax revenues from wealthy households. For ordinary people, a better funded IRS and adequately staffed IRS means fewer headaches.

Most people are trying to file your taxes adequately, honestly, on time. And it just takes way too much time and costs way too much money. And it doesn't have to be that way. Having an adequately staffed IRS means that there will be people there to actually pick up funds. In prior years, the IRS had satisfactorily answered just 15% of phone calls last year. The first tax year after they had the new funding, it resolved 85% of phone calls. And for most people, that's still too low. That's a remarkable improvement in one year. 

The $20 billion decision passed last week is very unfortunate. I suppose it was politically necessary given the dynamics of the House of Representatives right now, and it will increase the deficit by all accounts. But what we need now is for lawmakers to stop there and protect the agency and make sure that the agency is adequately staffed and funded.

And that's for the benefit of regular taxpayers and for the government's fiscal health.