Tax Coordination

• Jurisdiction: United States,Federal
• Publication year: 2022
• Citation: Vol. 38 No. 3

Tax Coordination

Blaine G. Saito
Northeastern University, b.saito@northeastern.edu

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TAX COORDINATION

Blaine G. Saito^*

Abstract

The United States implements much of its social policy through its income tax laws. The Code is rife with tax expenditures for education, housing, community economic development, retirement savings, and health care to name a few. But the IRS is not an agency with expertise in any of these areas and developing such expertise would draw resources away from its core tax administration mission. Commentators have thus called for a series of changes from turning these tax expenditures into outlays for these programs to divesting the IRS/Treasury of most of the administration of social policy tax expenditures. Yet, given American politics and the institutional structure of the federal government, these moves are both unlikely to occur and unwise.

This Article suggests a different and more promising route. It argues that agency coordination between the IRS/Treasury and other federal agencies, or in other words—tax coordination—would improve administration, management, and potential outcomes of these social policy tax expenditures. Drawing on the well-established literature in administrative law and public administration regarding agency coordination, this Article shows the benefit of tax coordination. It then presents case studies where the IRS works with other agencies to

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administer certain tax measures for social policy. Finally, it employs insights from the public administration literature to recommend institutional and managerial changes that would make tax coordination successful.

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CONTENTS

Abstract................................................................................735

Introduction.........................................................................739

I. Tax Coordination to Improve Tax Expenditures.......743

A. Why We Need to Keep the IRS/Treasury Involved.....744

1. Functional Analysis of the Tax System as Delivery Mechanism............................................................ 745
2. Politics and Institutions........................................746
3. The Advantages of the IRS/Treasury as an Administrator........................................................ 749

B. Tax Coordination's Benefits......................................752

1. Expertise...............................................................752
2. Limiting Cross-Purposes and Conflicting Commands ............................................................ 754
3. Resource Efficiency .............................................. 755
4. Limiting Capture..................................................756

C. Coordination Concerns ............................................. 757

1. Indeterminacy, Turf, and Unproductive Conflict . 757
2. Loss of Useful Competition .................................. 759
3. Separation of Powers...........................................761

II. Tax Coordination Case Studies...................................763

A. The Low-Income Housing Tax Credit: Failure Without Coordination .............................................................. 764

1. The LIHTC's Operation and Missing Coordination ..............................................................................765
2. Problems of Management.....................................767
3. Takeaways............................................................769

B. ERISA: Working Out Coordination Later..................770

1. Coordination by Accident: ERISA's Enactment and What It Does.........................................................770
2. Creating Reorganization Plan No. 4 of 1978.......775
3. Takeaways............................................................778

C. The Affordable Care Act: Successful High Stakes Coordination .............................................................. 780

1. The Premium Tax Credit's Role in the ACA........780
2. Efforts at Coordinating the ACA's PTC...............783
3. Takeaways............................................................788

III. Smart Practices for Tax Coordination....................789

A. Institutional Changes ................................................. 790

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1. Congress: Statutes and Retooling........................791
2. Changes in the IRS and Treasury.........................793
3. The Executive Office of the President: OMB and OIRA.....................................................................794

B. Managerial Tools and Cultural Shifts.......................796

1. Trust and Intellectual Capital..............................796
2. Empowered Line-Level Teams.............................799
3. Leadership............................................................802
4. Memorandums of Understanding (MO Us)...........803
5. Performance Metrics............................................805
6. Information Sharing.............................................805

Conclusion............................................................................807

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Introduction

The Internal Revenue Code (Code) and its associated regulations have conquered large swaths of the social policy world. Within them, there are important social policy measures for addressing health care,¹ housing,² education,³ poverty,⁴ and retirement,⁵ just to name a few. In many ways, tax is at the center of the policy world. This expansion has led to the adage that if someone really wants to make important social change, they need to have at least a basic understanding of tax.

The Internal Revenue Service (IRS) and its parent agency, the Department of the Treasury (Author refers to these two agencies collectively as the IRS/Treasury), administer the Code. Although the IRS/Treasury are filled with dedicated employees, their main focus and specialty are in the area of tax law and the collection of revenue rather than implementation of the myriad social policy areas now contained in the Code. But as tax expenditures extended their tentacles into other areas of policy making, the IRS/Treasury are now also tasked with becoming experts in other social policy spheres. Failure to expand expertise would result in the improper administration and program management of these tax expenditures. But given the declining budget of the IRS,⁶ administering and running effective

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program management of these social policy tax expenditures takes vital resources away from the IRS's core tax collection, audit, and taxpayer service functions. The IRS is thus forced to choose between spending its budget on more revenue agents to audit taxpayers and hiring or training revenue agents to become experts on social policy programs.

In light of this difficult choice that the IRS/Treasury must make, commentators have offered two solutions. one is to eliminate social policy tax expenditures and turn them into actual outlays of funds administered by agencies involved in social policy.⁷ The other is to keep the tax expenditures in the tax law but have them entirely administered by agencies that run similar social policy programs.⁸

But both of these calls are misguided. Entirely eliminating these social policy tax expenditures from the Code is frustrated by politics and the institutional arrangements of Congress.⁹ Eliminating the roles of the IRS/Treasury from administering social policy tax expenditures runs a risk that other social policy agencies would need to develop expertise in understanding and interpreting the tax laws in-house, or

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they risk making serious mistakes.¹⁰ Furthermore, because the IRS/Treasury are experts in the tax laws, they also have a broader view of how various aspects of the Code interact with one another. Without their active management, there could be complicated and problematic divergences, resulting in impossible-to-comply-with tax directives or significant confusion.¹¹

This Article argues that agency coordination between the IRS/Treasury and another set of agencies in the federal government is a promising solution to this problem.¹² This coordination between the

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IRS/Treasury and other federal agencies is what this Article calls "tax coordination." By working together with other agencies with greater expertise, the IRS/Treasury can likely better monitor social policy tax expenditures, manage them, and leverage resources. Agency coordination has the potential to allow these tax expenditures to better meet their social policy goals while maintaining some coherence in the tax laws.

But tax coordination appears to be used sparingly, and few have discussed it. Many tax expenditures geared toward social policy do not have any coordination effort between the IRS and another agency.¹³

This Article is the first to map how agency coordination can lead toward better administration of the tax laws and social policy tax expenditures. It puts into conversation three bodies of scholarship: the tax law and policy; the well-developed agency coordination and conflict literature in administrative law; and the work in public administration and management on how to make coordination successful.¹⁴ The insights drawn from these previously siloed discussions promise new paths that improve the administration, management, and performance of social policy tax expenditures.

Overall, this Article takes a positive view on agency coordination as an effective way to address the matter of tax policy. coordination will not always be easy and magically solve these problems. Agencies sometimes do not want to work together and often have little incentive to do so.¹⁵ Sometimes there can be conflict. Though conflict can be productive, improper turf wars can undermine coordination.¹⁶ The goal of a coordination effort is to harness conflict and differing viewpoints toward some common goal.

This Article proceeds in three parts. Part I argues that tax coordination is a useful solution to the problems involving social policy...