Welcome to the first installment of a new (periodic) column in Tax Executive, through which I aim to share select insights and observations of interest to TEI members regarding the post–tax reform advocacy environment in Washington, D.C. The historic tax reforms enacted in Public Law 115-97, colloquially known as the Tax Cuts and Jobs Act (TCJA), have inspired many TEI members to become more involved in the Institute’s advocacy activities. Those activities, in turn, have become increasingly focused on the administrative rulemaking process as the Treasury Department works to fulfill its statutory mandates to issue regulations and other guidance under the new law.
The TCJA contains seventy-nine explicit grants of regulatory authority to the Secretary of the Treasury, some of which are exceedingly broad in their delegation of policymaking discretion. Congress also left a number of significant gaps (and glitches) in the statute that warrant the exercise of Treasury’s general authority to adopt “all needful rules and regulations” under Section 7805(a) of the Internal Revenue Code. It is only natural, therefore, that TEI members have become increasingly interested in the regulatory sausage-making process, which is the subject of my first column. In particular, I felt it worthwhile to share some observations about the new Memorandum of Agreement (MOA) between Treasury and the Office of Management and Budget (OMB) for the review of tax regulations under Executive Order 12866.
Background
On April 21, 2017, President Donald Trump ordered Treasury and OMB to review and, if appropriate, reconsider the scope and implementation of the existing exemption for certain tax regulations from the review process set forth in Executive Order 12866. Under that exemption, the review procedures of Executive Order 12866 were generally waived with respect to all tax regulations except legislative regulations that were “significant” as defined in the executive order (e.g., likely to have an annual effect on the economy of $100 million or more). A similar waiver applied with respect to revenue rulings, revenue procedures, legal determinations, and other similar ruling documents issued by the Internal Revenue Service.
The New MOA
On April 11, 2018, Treasury and OMB entered into a new agreement that supersedes—yet largely resembles—their preexisting arrangement for the review of tax regulations under Executive Order 12866. The new MOA provides the general terms under which OMB’s Office of Information and Regulatory Affairs (OIRA) will review tax regulatory actions going forward. Notably, the new MOA received some high praise from then-Acting IRS Commissioner David Kautter, who told reporters that it “does a terrific job of striking a balance between allowing OMB to look at regulations that are economically significant and allowing Treasury and IRS to get regulations out in a timely fashion.” Here are the major takeaways from a TEI advocacy perspective:
Under the new MOA, a tax regulatory action will be subject to review by OIRA under Executive Order 12866 if it is likely to result in a rule that may “have an annual non-revenue effect on the economy of $100 million or more, measured against a no-action baseline.” A rule that meets this standard is considered “economically significant” and will be subject to additional rulemaking and analytical requirements—including the performance of a full Regulatory Impact Analysis.
- The new MOA’s standard for “economic significance” is a positive outcome, because it focuses on nonrevenue economic effects (e.g., direct administrative and compliance costs); it clarifies that the amount of taxes imposed or collected under a regulation should not count in determining its economic effect.
- The new MOA also provides a delayed effective date for the additional rulemaking and analytical requirements applicable to economically significant regulations; they will take effect on the earlier of twelve months from the date of the MOA or when Treasury obtains reasonably sufficient resources (with the assistance of OMB) to perform the required analyses.
The new MOA expands the universe of tax administrative guidance potentially subject to review by OIRA under Executive Order 12866.
- The new MOA makes no distinction between legislative and interpretive regulations; the latter are no longer categorically exempt from the review procedures of Executive Order 12866.
- The new MOA applies to “tax regulatory actions,” which are broadly defined to include certain nonregulatory tax guidance documents (e.g., revenue rulings, revenue procedures, notices).
Finally, in a bid to address concerns that OIRA review would impede the timely implementation of the TCJA, the new MOA allows Treasury to designate certain tax regulatory actions for expedited release and directs OIRA to complete its review of such actions within ten business days. For all other tax guidance subject to the review procedures of Executive Order 12866, OIRA will have forty-five days to complete its review.
Implications
Consistent with the Trump administration’s dual mandate to reduce regulatory burdens and to provide timely guidance to taxpayers, the new MOA adopts a relatively balanced approach. On the one hand, it reflects a continuing recognition that tax regulations are a unique body of agency action and warrant a measured exception from the centralized review procedures of Executive Order 12866. On the other hand, the MOA moderately increases OMB’s oversight of the development of significant tax regulatory actions in a manner consistent with the underlying philosophy and principles of Executive Order 12866. The process of issuing tax guidance will change and may ultimately take longer for significant regulatory actions under the new MOA, but it should also provide the public with more careful and transparent analyses of their anticipated economic effects, along with additional opportunities for constructive engagement.
Watson M. McLeish is tax counsel for Tax Executives Institute, Inc., in Washington, D.C., where he supports the activities of the Institute’s Tax Reform Task Force, Federal Tax Committee, and Canadian Income Tax Committee.
Editor’s note: TEI members wishing to learn more about the Institute’s TCJA-related advocacy activities are invited to contact Emily T. Whittenburg, chair of TEI’s tax reform task force, at [email protected].
