Get Ready for the Great 2018 Tax Mess

files-1614223_960_720That big gust of wind you’re about to hear is a massive exhalation of relief from Republicans that, at long last, they’ve managed to pass a major piece of legislation in 2017.

Notwithstanding Doug Jones’ upset win in Alabama on Tuesday, Congressional Republicans appear to be on track to send to the White House a sweeping tax bill in the coming weeks. But that joy may be short-lived, for 2018 could be a very messy year – for taxpayers, and for them.

It’s worrisome enough for Republicans that their tax plan is massively unpopular. Their bigger problem is that the plan is massively complicated. Even with a carefully thought-out process, major changes to the tax code always lead to unintended consequences and intractable conflicts between provisions that won’t become apparent until CPAs and tax attorneys apply the new laws to their clients’ finances. The tax code is like a humongous Jenga tower: change one incentive or rule, and it impacts scores of others downstream.

And the current bill is hardly the product of thoughful deliberation. Already the bill’s writers have had to confront glaring contradictions and paradoxes as they cobbled together enough votes to pass it.

Once the final bill is signed into law, it will fall on staff at the Treasury Department and IRS to make sense of the new law, educate the public about how to apply new rules and clarify details that Capitol Hill left fuzzy.

And that’s the real problem: Treasury doesn’t seem even remotely ready to handle it.

The current fiscal year 2018 budget plan cuts funding for the IRS, on top of years of cuts that have left its staff depleted. As National Treasury Employees Union President Tony Reardon testified before a House Ways and Means subcommittee this week:

Since FY 2010, overall funding for the IRS has declined by more than $900 million, or 17 percent when adjusted for inflation, while the number of individual taxpayers has increased by 10 million, or more than 6 percent.  These reductions have forced the Service to reduce the total number of full-time, permanent employees by almost 21,000, and resulted in a reduction in the number of employees assigned to answer telephone calls from 9,400 in 2010 to 6,200 in 2015, a 34% drop.

Meanwhile, National Taxpayer Advocate Nina Olson highlighted IRS budget cuts as one of the agency’s major challenges in her 2016 annual report to Congress, stating that “the IRS cannot function well in the 21st century with the budget it has today.”

Reardon also pointed out that during the 1986 tax reform process, Congress actually provided additional funding to IRS to hire more staff.  That’s a far cry from today, when Treasury could only muster a measly  one-page “report” on the bill that would get them kicked out of a high school AP class.

Capital Zoo raised this issue with a moderate Republican House member from the northeast this week. This member, who wants to support the final bill, shared his concern that the administration hasn’t been up to the task so far of explaining or analyzing the bill. But it’s unlikely that pedestrian concerns about competence or capacity will slow down the tax train.

As a result, once the bill passes, expect a hot mess of confusion and controversy about how to interpret and apply the new laws. Remember the disastrous rollout of following the enactment of Obamacare? That will look like a walk in the park in comparison.

The larger problem, however, is not the confuision itself, but its consequences. If the new rules go into effect in January 2018, business will need to account for the new law as they plan finances for the year, debate investing in new equipment and make capital investments. How can they make business decisions like these without understanding their true tax implications?

If the tax code is unclear, and Treasury is unable to provide answers, both businesses and individuals could choose to delay spending decisions, which would slow the economy – the precise opposite of what the bill’s backers hope to see. That would make 2018 an extremely bumpy ride for an already unpopular bill – and for those who voted for it.

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