Hemel: Tax Regulations And The New Cost-Benefit Analysis

Daniel J. Hemel (NYU; Google Scholar), Tax Regulations and the New Cost-Benefit Analysis, 181 Tax Notes Fed. 1977 (Dec. 11, 2023): 

The White House Office of Management and Budget released a much-anticipated revision of its guidance to federal agencies regarding regulatory cost-benefit analysis — a document known as Circular A-4 — on November 9, 2023. The new Circular A-4, which supersedes the 2003 version, encourages agencies to analyze the distributional effects of proposed regulatory actions as part of their cost-benefit analysis and provides detailed instructions for how to do so. If agencies heed the new Circular A-4’s guidance, distributional considerations will become an increasingly important element of regulatory decision-making across the federal executive branch.

Yet there is at least one area of regulation in which the new Circular A-4 won’t have any immediate effect: tax.

Under a June 2023 memorandum of agreement between Treasury and the OMB, “tax regulatory actions” — defined to include all regulatory actions in accordance with all federal income, excise, estate, gift, and employment tax laws — are exempt from the analytical requirements of Circular A-4. The anomalous result is that the new framework for distributional analysis of federal regulations doesn’t apply to the regulations that have the largest distributional effects: those promulgated by Treasury and the IRS that shape the federal tax system.

The exemption of tax regulations from Circular A-4’s distributional analysis framework is not only anomalous but also — and worse yet — counterproductive to the Biden administration’s redistributive objectives. Any serious effort to address income and wealth inequality through federal regulatory action must involve tax regulations. The IRS can accomplish some amount of redistribution through audits of high-net-worth individuals and corporations, but a single stroke of the regulatory pen can accomplish vastly more — in sheer dollar terms — than thousands of grueling, yearslong field exams. If the Biden administration is genuinely committed to its stated goal of achieving a more equitable distribution of regulatory benefits and burdens, it should reconsider its decision to exempt Treasury and the IRS from Circular A-4’s regulatory analysis requirements.