Treasury and White House Regulatory Chief Agree to Vet IRS Rules

After much internal back and forth, the Treasury Department and the top White House regulatory chief reached a memorandum of understanding Wednesday night that will allow the Office of Management and Budget to review proposed new tax rules from the Internal Revenue Service.

Since 1983, the tax specialists at the IRS have been free to promulgate rules independently under a Reagan administration agreement drafted soon after rulemaking review was first centralized at the White House Office of Information and Regulatory Affairs.

But since enactment in December of the major new tax law, the Trump administration has sought to ensure both a rapid implementation and greater control over the tax service. So the new agreement—announced at a Thursday hearing of the Senate Homeland Security and Governmental Affairs Regulatory Affairs Subcommittee—will bring proposed major tax rules “under the same framework” for rulemaking required of other agencies, according to Neomi Rao, administrator of OIRA, a part of OMB. “The MOU gives OIRA an opportunity to review and add value” to proposed tax rules, which the office can do “when appropriate and quickly.”

The IRS did not respond to a Government Executive query about the new memorandum of understanding on centralized rule review.

“We anticipate OIRA to be forward-leaning,” said hearing chairman Sen. James Lankford, R-Okla., warning that if the IRS is rushing a rule, the new MOU will allow OIRA to ensure that it does not rely unduly on guidance not backed by statutes, and that small businesses have ample opportunity “for a seat at the table.” By asking, “Is there a better way to do it?” OIRA, working with affected businesses, can “lean in” before the rule goes out and faces “a court challenge that will cost millions of taxpayer dollars and turmoil in the economy,” Lankford said. He cited several instances in which the IRS “got it wrong” and proposed rules had to be recalled, as well as small business complaints that some Obama administration rules were done without proper economic analysis.

The OIRA approach to tax rule review “must walk a fine line between having the oversight but getting the rules out” in a timely way, noted Sen. Rob Portman, R-Ohio, a former OMB director. Under the new tax law, “business needs certainty” but also rules that are implemented “as soon as possible for the pro-growth elements to take effect.”

Brent McIntosh, the general counsel at Treasury and the only other witness, said, “The new tax reform has hundreds of provisions, so swift and straightforward implementation is critical” to promote timeliness with necessary clarity. He said he is “extremely pleased” that the MOU “restores the original intent of the Reagan-era agreement.” It preserves Treasury’s ability to do cost-benefit analysis while allowing a “centralized review, which is exactly as it should be,” he said. He joined Rao in promising that OIRA review of the average major rule could be done “in 10 business days or less.”

Treasury Secretary Steven Mnuchin has identified 300 rules to be eliminated or simplified, among them the “extremely complex” Volcker rule, a part of the 2010 Dodd-Frank Financial Reform Act that curbs banks’ ability to invest, as well as provisions of the new tax law such as those affecting pass-through business income and repatriation of overseas capital.  “I don’t believe it will lead to undue delays, and OIRA will work with us to expedite” the process, McIntosh added.

But Sen. Heidi Heitkamp, D-N.D., warned that the new tax law has so many “unintended loopholes, it has the potential of having a Mack truck drive through it.” The changes in the tax code “were not vetted, and will have to be analyzed there” at IRS and OIRA, she said. The IRS has lost 20,000 employees since 2010, Heitkamp said, “and we need to know as an oversight body if you have enough people.”

Both Rao and McIntosh said their offices could probably use another 10 staffers, and OIRA just expanded its tax expertise by hiring tax law professor Kristin Hickman, Rao said. “With career staff and economists working together, I am confident we can do it in a way that‘s expeditious,” Rao said. "There are things OIRA will need to learn about the process.”

In Rao’s broader testimony, she declared the Trump deregulatory push a “substantial success” that had made 67 deregulatory moves and added only three significant regulatory moves, a 22-1 ratio that had saved taxpayers $8 billion. Next year, the team hopes to save $10 billion by further incentivizing agencies to identify rules and guidance that can be repealed “but only those that are not working.”

Heitkamp pronounced herself “very disappointed” in the administration’s effort to repeal an Obama rule protecting restaurant staffers’ tips from control by owners, noting that Rao was “caught in the middle” and forced to speak for the Labor Department, which declined to send a witness. News reports in February said that Labor Secretary Alexander Acosta and possibly Rao had overruled career agency economists and issued a proposed rule without a cost-benefit analysis, saying the data were not high quality.

“That attitude was fairly cavalier,” Heitkamp said, calling the process used to roll back the existing rule “backhanded, ham-handed, irresponsible rulemaking.” She said she was “deeply concerned” that the same robust standards for evidence were not being applied when the agenda is deregulatory, and complained that the Trump administration had dismissed the news reports of a quashed internal study as “fake news” and false reporting. “I’m assuming it will be done professionally,” she added. “We will be watching, we need to lay down a marker,” given the high level of mistrust in the country.

Sen. Maggie Hassan, D-N.H., echoed those views, noting that Congress in the omnibus spending bill signed into law in March “fortunately” had put into statute the main protections of the restaurant tipping rule.  “The public deserves information on the proposed rule, which in general includes quantitative analysis,” she said. “We’re talking about money in the pockets of workers. That was a real mistake and showed a real disregard for quantitative analysis,” which was overruled by “political considerations,” she said.

Hassan also challenged Rao to defend EPA Administrator Scott Pruitt’s proposal to revamp requirements for use of scientific data in rulemaking to limit it only to established evidence that can be released to the public. Noting that many health studies on such issues as opioid abuse rely on confidential medical evidence, she said, “There isn’t perfect scientific data, it’s an ongoing process. If you wait for a so-called perfect process, you won’t have the best available data.”

Rao responded she was working with EPA, but said “it is important that the public have information on the evidence used.” She declined to go into detail on her role in the handling of the restaurant tipping rule, but said best practices require getting as much quantitative analysis to the public as possible. She stressed her commitment to transparency, saying OIRA is one of the most transparent in the executive branch.

“I can’t speak to the process” in the Labor case, she said, but Acosta “believed that data available was not sufficient” and to release it would be “misleading.” The plan, she said, is to release it with the final rule. That, the Senate Democrats pointed out, would mean the public would not have any opportunity to comment.