August 22, 2022
Where an expanded IRS is likely to focus its efforts and what can be done about it
“Because that’s where the money is.”
It’s a quote so legendary that most of us can recite the question that prompted it without missing a beat. Notorious criminal Willie Sutton had been asked by a reporter named Mitch Ohnstad why he robbed banks. Many people these days may not remember Willie Sutton, but they do remember those words.
As the ink of President Biden’s signature dries on the Inflation Reduction Act (a name likely to disappoint), Willie Sutton’s answer may give us some guidance as to what comes next.
A lot of attention has been focused on the massive amount of money — $80 billion over the next ten years — the act will be sending to the IRS, much of it intended to pay for the hiring of 87,000 people. To be fair, some of these hires will fill vacancies and replace future retirees. Nevertheless, it’s highly probable that many of the effects of this strengthened IRS will be felt painfully in conservative-governed states.
Over the past three decades, a great sorting has been at work in the U.S. By the millions, Americans are departing the blue-state Axis of Despair (California, New York, Illinois) for better lives and less taxation in states such as Florida, Texas, Idaho, and Arizona. In 2020, the three blue states mentioned above saw a net loss of more than half a million people combined. When individuals depart their home state for economically greener pastures, they take their money with them. That same year, Florida gained over $23 billion in adjusted gross income, Texas more than $6 billion, Arizona almost $5 billion, and Idaho over $2 billion. Where did it come from? You guessed it — $19 billion gone from New York, almost $18 billion gone from California, more than $8 billion gone from Illinois. That’s just one year. Extend the time horizon, and this trend becomes even more remarkable. Between 1992 and 2019, Florida gained more than $205 billion in annual income from individuals moving there from other states. Texas, similarly, gained over $57 billion and Arizona over $46 billion. The pandemic accelerated a long-running reality: Those who can leave progressive, blue states do so. And when they do, blue states feel the pinch.
However, here is where the boost in IRS staffing comes in. Not all the new agents, of course, will be auditors, but many will be. Where is the IRS going to concentrate the bulk of its enhanced capacity? Are agents going to land in Illinois to audit residents there hanging on because they can’t get out? Are they going to be focusing on California’s remaining holdouts? Spoiler alert: No, they won’t. Make no mistake; they will have their collective sights set on states such as Texas and Florida, and it won’t only be “the rich” who feel the pressure.
If there is one consolation, it is this: Red states can erect some lines of defense against the inevitable overreach, harassment, and forthcoming headaches. And we are already seeing this begin to take shape. Florida’s chief financial officer, Jimmy Patronis, took the initiative this week with a preemptive, four-step plan to fight back against what almost certainly lies ahead. He proposed policy to require state-chartered banks to regularly report on IRS engagement, establish a civil-liability trust fund for small businesses caught up in IRS harassment, introduce state-level registration requirements for IRS agents engaged in account investigation, and institute criminal penalties for viewpoint discrimination in audits. This is a solid first step, and it is an example that other red (or even purple) states should follow, especially if they are now home to large numbers of people who have quit high-tax blue states.
Why? Because that’s where the money is.
