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The IRS is at risk of losing $20 billion in funding

WEST PALM BEACH, Fla. | Already bracing for funding cuts under a new Trump administration, U.S. Treasury officials are calling on Congress to unlock $20 billion in IRS enforcement money that is tied up in legislative language that has effectively rendered the money frozen.

Hoping to unlock the funds in upcoming budget negotiations, Treasury officials are rushing for action before President Joe Biden’s term ends.

The $20 billion in question is separate from another $20 billion rescinded from the agency last year. However, the legislative mechanism keeping the government afloat inadvertently duplicated the one-time cut.

Treasury officials warn of dire consequences if the funding is effectively rescinded through inaction. The loss of that money would lead to an increase of the national deficit by $140 billion, Treasury Deputy Secretary Wally Adeyemo said on a call to reporters on Tuesday. There would be 6,000 fewer audits of wealthy individuals and 2,000 fewer audits of large corporations, and the agency would have to go on a hiring freeze, he said.

“The IRS is going to potentially have to make dramatic decisions about stopping hiring and starting to budget for a world which they don’t have $20 billion which will stop a lot of their progress,” Adeyemo said. “If they don’t get that $20 billion that is at risk they would run out of enforcement money at the current pace sometime in fiscal year 2025.”

Adeyemo was joined by Maya MacGuineas, president of Committee for a Responsible Federal Budget, who also issued a warning about the ramifications of overall spending cuts to the IRS, and how pulling back agency enforcement funding could negatively impact the federal deficit.

The federal debt stands at roughly $36 trillion, and the spike in inflation after the coronavirus pandemic has pushed up the government’s borrowing costs such that debt service next year will exceed spending on national security.

“Given the fiscal situation we deeply hope there is no backsliding in the coming months and years with rescinding, diverting, repealing any of the revenue that is going effectively into the IRS to help with tax collection,” MacGuineas said.

The federal tax collection agency originally received an $80 billion infusion of funds under the Democrats’ Inflation Reduction Act though that money has already been clawed back. A 2023 debt ceiling and budget-cuts deal between Republicans and the White House resulted in $1.4 billion rescinded from the agency and a separate agreement to take $20 billion from the IRS over the next two years and divert those funds to other nondefense programs.

The news also comes as President-elect Donald Trump and a Republican majority sweep of the Senate and House of Representatives promise major policy changes for the White House and Congress.

While Trump has spoken at length about his proposed tax plans, he has not spoken as much about the agency in charge of administering tax policy or explicitly said he would cut the IRS’ budget. He has, however, repeated a debunked claim that the IRS has hired 87,000 armed enforcement agents to pursue taxpayers.

Congressional Republicans, meanwhile, have threatened to take back the tax collection agency’s modernization funding and have vowed to cut the IRS’ Direct File program.

Federal Reserve officials signal cautious path for rate cuts

WASHINGTON | With inflation still elevated, Federal Reserve officials expressed caution at their last meeting about cutting interest rates too quickly, adding to uncertainty about their next moves.

Even if inflation continued declining to the Fed’s 2% target, officials said, “it would likely be appropriate to move gradually” in lowering rates, according to minutes of the November 6-7 meeting.

The minutes don’t provide much guidance about what the Fed will do at its next meeting Dec. 17-18. Wall Street investors see the odds of another quarter-point reduction in the Fed’s key rate at that meeting as nearly even, according to CME Fedwatch. Most economists think officials will probably cut rates next month for the third time this year, but could then skip cutting at following meetings.

Kathy Bostjancic, chief economist at Nationwide, said she expects the Fed will cut its key rate by a quarter-point next month, to about 4.3%. But officials will “likely pause” early next year “to assess prospective policy changes under the second Trump administration as well as the current landscape of economic activity and inflation,” she added in a client note.

In September, the Fed signaled it would reduce its key rate as many as four times next year, but since then investors and economists have come to expect fewer cuts. The economy is growing at a solid pace, inflation is showing signs of getting stuck above the Fed’s target, and President-elect Donald Trump’s proposals, particularly higher tariffs, could also accelerate inflation.

Inflation fell to 2.1% in September, down from a peak of 7% in mid-2022, providing Fed officials with the confidence to implement a steep half-point reduction in its key rate that month.

But excluding the volatile food and energy categories, so-called “core” prices are more elevated, rising 2.7% from a year earlier in September. And they are expected to have risen again last month, when that data is reported Wednesday, to 2.8%.

Most officials at last month’s meeting expressed confidence that inflation is steadily falling back to target, the minutes said. Yet they also said that it “remained somewhat elevated” and a couple of officials “noted the possibility that the process could take longer than previously expected.” Nineteen people participate in the Fed’s interest rate policy discussions, though only 12 have a vote.

Many of the policymakers also noted that it was uncertain how far the Fed would have to cut its rate. There is broad disagreement among officials about what level of the Fed’s rate would neither restrain nor stimulate growth. As a result, the minutes said, that “made it appropriate to reduce (interest rates) gradually.”

The Fed is trying to calibrate its policies so that it doesn’t cut rates too quickly and allow inflation to surge again. At the same time, it doesn’t want to reduce them too slowly, which could drag down hiring and growth.

If inflation stayed too high, Fed officials could “pause” their rate cuts, the minutes said, while if the economy slowed and unemployment rose, they could reduce rates more quickly.

U.S. consumer confidence

ticks higher

WASHINGTON | Americans’ outlook on the economy improved modestly in November, lifted by expectations for lower inflation and more hiring.

The Conference Board, a business research group, said Tuesday that its consumer confidence index ticked up to 111.7 from 109.6 in October. The small increase followed a big gain in October.

Rising consumer confidence suggests Americans may spend more in the coming months, which would help boost economic growth. Yet Americans have been spending at a healthy clip for much of the past two years even as confidence measures have been low, a sign that sentiment surveys may not be as useful a guide to the economy’s direction as they were in the past.

The uptick comes after President-elect Donald Trump’s victory in the presidential election. The Conference Board doesn’t break out its responses by party, but another measure of consumer sentiment by the University of Michigan showed that optimism about the economy jumped among Republicans after the election.

In the Conference Board’s report, the proportion of Americans who anticipate a recession in the next 12 months fell to the lowest level since the group first began asking the question in July 2022. And consumers’ optimism about future hiring rose to its highest level in nearly three years.

The survey found that Americans’ expectations for future inflation fell to its lowest level since March 2020, nearly a year before consumer prices began rising quickly. When asked about their hopes for 2025, “consumers overwhelmingly selected higher prices as their top concern and lower prices as their top wish for the new year,” the Conference Board said.

The report comes just hours after President-elect Donald Trump said he would impose stiff 25% tariffs on all imports from Canada and Mexico, and an additional 10% on imports from China. Economists and some retailers warn that such duties, if enacted, would be inflationary.

“Households for now seem to have their heads in the sand about the potential uplifts to consumer prices from tariffs and deportations, or they think Trump wasn’t serious about his intentions during the campaign,” Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, wrote in a client note.

—From AP reports