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The Sequester

Posted by Anton Ewing Posted on Mar 03 2013

On August 2, 2011, the Congress passed the Budget Control Act of 2011 (the Act). The Act raised the debt ceiling but also included the sequester as an incentive for the Joint Select Committee on Deficit Reduction (the Super Committee) to cut at least $1.2 trillion in federal spending over the next decade. Under the sequester, if the Super Committee did not reach its goal, across-the-board reductions in spending in the amount of $1.2 trillion would have to be made.

The reductions in spending must be allocated 50 percent to defense spending and 50 percent to nondefense functions. The Super Committee was composed of 12 members of both the U.S. House of Representative and the U.S. Senate. Bipartisan majorities in both the House and Senate voted for the threat of sequestration as a mechanism to force Congress to act on further deficit reduction.

The specter of harmful across-the-board cuts to defense and nondefense programs was intended to drive both sides to compromise and was never intended to be implemented. However, the Super Committee failed to reach an agreement and, effective, March 1, 2013, the sequester is scheduled to take effect.

The Office of Management and Budgets recently released the OMB Report Pursuant to the Sequestration Transparency Act of 2012. The report provides estimates of the sequestration's impact on more than 1,200 budget accounts. With respect to the Treasury Department, the report lists the following services and functions of the IRS that are subject to the sequester:

1. Taxpayer Services

2. IRS Enforcement

3. Business Systems Modernization

On February 7, 2013, acting Treasury Secretary, Neal Wolin, wrote a letter to Senator Barbara Mikulski outlining the effects the sequestration would have on operations at the Treasury Department, which includes the IRS. According to Wolin, the effects would be particularly painful at the IRS because it would mean reducing the agency's ability to provide quality services to taxpayers. For example, he said, the cuts to operating expenses and expected furloughs would prevent millions of taxpayers from getting answers from IRS call centers and taxpayer assistance centers and would delay IRS responses to taxpayer letters.

The IRS would be forced, he said, to complete fewer tax returns reviews and would experience a reduced capacity to detect and prevent fraud. He noted that this could result in billions of dollars in lost revenue and further complicate deficit reduction efforts. According to Wolin, in recent years, each dollar spent on the IRS has returned at least $4 in additional enforcement revenue. Thus, each dollar the sequester cuts from current IRS operations would cause a net increase to the deficit, as the lost and forgone revenue would exceed the spending reduction.

He also noted that, in addition to providing fewer services at lower quality, sequestration would require reductions in a number of important Treasury programs that would adversely affect economic growth. The Treasury would need to reduce payments that support certain state and municipal bond programs through lower levels of refundable tax credits and direct payments to issuers likely increasing the borrowing costs to improve infrastructure, schools, affordable housing, and other needs for these communities.