Weekly SSRN Tax Article Review And Roundup: Glogower Reviews Wallace's Centralized Review of Tax Regulations

This week, Ari Glogower (Ohio State) reviews a new work by Clint Wallace (South Carolina), Centralized Review of Tax Regulations, 70 Ala. L. Rev. __ (2018).

When and how should tax regulations be subject to centralized review by the White House Office of Management and Budget (OMB)? Clint Wallace’s new work considers these timely questions. 

The work begins by describing the somewhat unique role of tax regulations among agency actions. Executive Order 12,866 generally requires that “significant” regulatory actions by agencies must be reviewed by the OMB’s Office of Information and Regulatory Affairs (OIRA). This process generally includes, among other considerations, a cost-benefit analysis by OIRA, interagency review, and in some cases analysis of a rule’s distributional effects.

Tax regulations, however, which are developed by the IRS Chief Counsel’s Office and the Treasury Office of Tax Policy, have generally not been subject to substantive OIRA review. Until recently, tax regulations have historically been characterized as “interpretative” rules that merely effectuate congressional policy, but do not independently have the force and effect of law, and are consequently not subject to EO 12866.  

A key insight of this work is that tax regulations vary significantly in their content and function, and a “one size fits all” approach to centralized review may not be appropriate for tax regulations. The work provides a four-part taxonomy of tax regulations, and then suggests that centralized review may be more or less appropriate for regulations in different categories. Tax regulations with a “private allocation” function allocate private resources to private uses, by affecting private behavior and investments through incentives and disincentives. Tax regulations with a “public allocation” function, in contrast, allocate private resources to public use, through revenue collection. Tax regulations with a “distribution” function affect the distribution of resources among taxpayers. And finally, tax regulations with am “implementation” function merely implement or effectuate the allocative and distributive policies determined by Congress. 

The work then argues that centralized review is most appropriate for tax regulations with a private allocation function, where the considerations are generally the same as with many other non-tax agency actions covered by EO 12866. In particular, centralized review of such regulations may, among other benefits, facilitate coordination across agencies, increase political accountability, introduce analytical rigor, and frustrate agency capture by interest groups. On the other end of the spectrum, tax regulations with an implementation function should be exempt from review, as in the case of other regulations without the force and effect of law. 

The work then argues that the analysis is more complicated for tax regulations with a public allocation or a distribution function. The work first argues that a modified form of centralized review may be desirable for regulations with a public allocation function, focused on quantified analysis of revenue estimates and interagency review. The work argues, however, that centralized review, as it is currently structured, is not well-suited for tax regulations with a distribution function. This is because distributional considerations are generally given a peripheral or secondary role in the centralized review process, but are of central importance in many areas of tax law. 

The work is important and timely, as policymakers reassess the question of executive oversight over tax regulations. Just a few weeks ago (and around the time the draft of this Article was posted), Treasury and OMB announced a new framework for OIRA review of tax regulations, that is likely to extend centralized review to a broader range of regulations, in accordance with the general criteria outlined in EO 12866.

Of course, as the work notes, the different functions of tax regulations are not mutually exclusive. Any single regulation may affect private behavior, raise revenue, and have distributional consequences. This point further complicates the questions of exactly when, and how, tax regulations should be subject to centralized review. Subsequent research could build upon the insights in this work to identify precisely how these “mixed function” regulations should be treated, and how they could be subjected to centralized review. Perhaps in this case the best course may be centralized review of the relevant aspects of the regulation, while acknowledging that the regulation may serve additional or countervailing functions that are beyond the scope of the review’s analysis. Alternatively, as this work suggests, the mixed function of tax regulations may necessitate modifications to the substance of centralized review analysis.

Importantly, the work also highlights the limitations of OIRA review of distributional effects, which is a central consideration in tax law and policy. The work suggests that “future refinements of methods for distributional analysis and procedures for considering distribution in the regulatory policy making process should be priorities.” Of course, assistance in this respect could also come from other policymakers, such as legislators, in the form of more explicit distributional commitments or targets against which the distributional effects of tax regulations could be measured.

Tax regulations are on a path to increased scrutiny and oversight in the years to come. This important work highlights why, if the tax regulatory process is evolving, the centralized review process must necessarily evolve as well in order to account for tax regulations’ complex and varied functions.  

Here’s the rest of this week’s SSRN Tax Roundup:

• Thad Calabrese (NYU), The Use of Locally Imposed Selective Taxes to Fund Public Pension Liabilities, in For Your Own Good: Taxes, Paternalism, and Fiscal Discrimination in the Twenty-First Century (Adam J. Hoffer and Todd Nesbit, eds., 2018)
• Peter Calcagno (Charleston) and Frank L Hefner (Charleston), Economic Development Tax Incentives: A Review of the Perverse, Ineffective, and Unintended Consequences, in For Your Own Good: Taxes, Paternalism, and Fiscal Discrimination in the Twenty-First Century (Adam J. Hoffer and Todd Nesbit, eds., 2018)
• R. Clark (Tennessee-Chattanooga) and Dwight R. Lee (SMU), Tax Reform as a Discovery Process, in For Your Own Good: Taxes, Paternalism, and Fiscal Discrimination in the Twenty-First Century (Adam J. Hoffer and Todd Nesbit, eds., 2018)
• Dennis Coates (Maryland-Baltimore County) and Craig A. Depken (UNC-Charlotte), Tax Schemes for Sports Venues, in For Your Own Good: Taxes, Paternalism, and Fiscal Discrimination in the Twenty-First Century (Adam J. Hoffer and Todd Nesbit, eds., 2018)
• Roger Colinvaux (Catholic), Failed Charity: Taking State Tax Benefits into Account for Purposes of the Charitable Deduction, __ Buffalo Law Review __ (forthcoming 2018)
• David Gamage (Indiana), Charitable Contributions in Lieu of SALT Deductions, 87 State Tax Notes 973 (March 12, 2018)
• Adam J. Hoffer (Wisconsin-La Crosse) and Todd Nesbit (West Virginia), Moving Forward: Tax Policy Lessons, in For Your Own Good: Taxes, Paternalism, and Fiscal Discrimination in the Twenty-First Century (Adam J. Hoffer and Todd Nesbit, eds., 2018)
• Marjorie E. Kornhauser (Tulane), The 'Invisible Government' and Conservative Tax Lobbying 1935 – 1936, 81 Law & Contemporary Problems __ (forthcoming 2018)
• Robert Lawson (SMU), The Economics of Gross Receipts Taxes: A Case Study of Ohio, in For Your Own Good: Taxes, Paternalism, and Fiscal Discrimination in the Twenty-First Century (Adam J. Hoffer and Todd Nesbit, eds., 2018)
• Philip Manns (Liberty) & Timothy M. Todd (Liberty), Higher Education Savings and Planning: Tax and Nontax Considerations, 5 Texas A&M L. Rev. 343 (2018)
• Matthew D. Mitchell (George Mason), Overcoming the Special Interests that Have Ruined Our Tax Code in For Your Own Good: Taxes, Paternalism, and Fiscal Discrimination in the Twenty-First Century (Adam J. Hoffer and Todd Nesbit, eds., 2018)
• Adam D. Moore (Washington), Taxation, Forced Labor, and Theft
• Edwin P. Morrow (Independent), IRC Section 678 and the Beneficiary Deemed Owner Trust (BDOT)
• Shu-Yi Oei (Boston College) & Diane M. Ring (Boston College), Tax Issues in the Sharing Economy: Implications for Workers, Cambridge Handbook on the Law of the Sharing Economy (Nestor M. Davidson, Michele Finck & John J. Infranca, eds., forthcoming 2018)
• Russell S. Sobel (The Citadel) and Joshua C. Hall (West Virginia), In Loco Parentis: A Paternalism Ranking of the States in For Your Own Good: Taxes, Paternalism, and Fiscal Discrimination in the Twenty-First Century (Adam J. Hoffer and Todd Nesbit, eds., 2018)