In June 2023, President Joe Biden signed into law the Fiscal Responsibility Act (FRA). In exchange for temporary suspension of the debt limit, thereby avoiding a default, the bipartisan law created budget caps for fiscal years 2024 and 2025, split between defense discretionary and nondefense discretionary (NDD) funding. Because it was seemingly important to House Republican leadership that the budget caps appeared low, the official budget caps were made low artificially: Although they seemed to call for enormous cuts in NDD funding, the White House and House Republican leadership negotiated and agreed to a side deal that would allow Congress to technically adhere to the budget caps while providing $69 billion of funding above the statutory NDD cap for FY 2024 and $69.69 billion above the cap for FY 2025. (see Table 1)
House Republican leadership walked away from the deal within a week and insisted on deeper cuts. The House appropriations process led to two near shutdowns, 5 of the 12 appropriations bills pulled, and the ousting of Speaker Kevin McCarthy (R-CA). With another continuing resolution set to expire and no progress on appropriations in sight, Senate Majority Leader Chuck Schumer (D-NY) and House Speaker Mike Johnson (R-LA) decided to revisit the original budget deal. The revised deal, reached in January, calls for the same statutory caps and the same amount of funding above the FY 2024 statutory NDD cap supported by $69 billion in a side deal, leading to the same total amount of NDD funding in FY 2024. (see Table 1) But how the revised deal accounts for the additional $69 billion differs meaningfully from the first proposal: It calls for more of the 2024 internal offsets to come from real cuts—particularly, a clawback of IRS funding primarily dedicated to catching wealthy tax cheats. And because the revised deal does not make a commitment to set a 2025 funding level, it leaves the door open to additional cuts that fiscal year.
How the budget caps and side deal work
The budget caps in the FRA set statutory limits on the total amount of base funding in the discretionary part of the budget—split between defense and NDD—which Congress funds in the annual appropriations process. The discretionary part of the budget accounts for roughly one-third of funding, and the limits, or caps, that apply to it do not apply to mandatory programs such as Medicare, Medicaid, Social Security, and the Supplemental Nutrition Assistance Program (SNAP). Mandatory programs are largely permanent and not at issue in the current appropriations fight.
Timeline of events
- April 17, 2023: House Speaker Kevin McCarthy demands statutory budget caps as a condition of raising the debt limit.
- June 3, 2023: Days away from government default, President Biden signs into law the Fiscal Responsibility Act, which, among other things, creates budget caps for two years in exchange for temporarily suspending the debt limit through January 1, 2025. A semi-secret side deal is agreed to, allowing for funding above the statutory caps. These caps, along with the side deal, constitute the budget deal.
- June 9, 2023: Speaker McCarthy indicates that he plans to deviate from the budget deal.
- June 2023–July 2023: House Republican appropriators, on a partisan basis, write bills that call for funding levels significantly below the budget deal. Senate appropriators, on a bipartisan basis, write and report out bills largely consistent with the budget deal, though with slightly more funding.
- July 2023–November 2023: House Republicans pull 5 of their 12 appropriations bills, after failing to secure enough support from their own caucus.
- September 30, 2023: Hours before a government shutdown, a continuing resolution is enacted, extending discretionary government funding through November 17.
- October 3, 2023: House Republicans move to vacate the speakership. There are insufficient votes to support Rep. McCarthy, and he is removed as speaker of the House.
- October 25, 2023: After many failed votes to elect a new speaker, Mike Johnson is elected the new speaker of the House.
- November 17, 2023: Another continuing resolution is enacted, extending all discretionary government funding through January 19, 2024, and some through February 2, 2024.
- January 7, 2024: Senate Majority Leader Chuck Schumer and House Speaker Johnson announce a revised budget side deal that largely adheres to the contours of the original side deal negotiated as part of the agreement to suspend the debt limit.
- January 19, 2024: Another continuing resolution is enacted, extending all discretionary government funding through March 1, 2024, and some government funding through March 8, 2024.
Budget caps prohibit total base NDD funding from exceeding the NDD statutory cap, and total base defense discretionary funding from exceeding the defense discretionary statutory cap. If the caps are exceeded, a mechanism known as sequestration automatically cuts funding by an amount equal to the overage.
However, any funding offsets included in the appropriations bills—internal offsets—count as credits against the total scored funding level. For example, if Congress were trying to hit a target of $1 trillion, it could provide $1.010 trillion in new funding, along with $10 billion of internal offsets in the same year (regardless of whether the offsets were due to real changes or budgetary gimmicks), so that the total net funding in the appropriations bills would be scored as meeting the $1 trillion target. Congress has engaged in this practice every year for the past dozen years, with the internal offsets being almost entirely due to cuts that do not produce actual budgetary savings.
Additionally, Congress may designate any funding as “emergency” funding. In addition to funding actual emergencies, in the past few years, Congress has used emergency funding as a way to help finance some ongoing base operations. When statutory budget caps exist, they are automatically increased by the commensurate amount in order to make room for the emergency funding.
The budget side deal, both in its original form and as revised in the Schumer-Johnson deal, employs both of these tactics to avoid breaching the statutory caps while providing room for additional funding above the NDD cap.
For FY 2024, both the original side deal and revised side deal call for $69 billion in additional NDD funding; thus, each calls for the same level of total NDD funding. The difference between the deals is in how they achieve these levels.*
The original NDD side deal achieved less than one-quarter of the additional NDD funding through real funding cuts. In the revised deal, in contrast, nearly half of the funding comes through real funding cuts.** In total, the revised side deal calls for $12.5 billion to come from phony emergency designations, $53.7 billion to come from cuts, and $2.8 billion to come from Congress using the Office of Management and Budget’s (OMB) estimate of an additional specific offset rather than the Congressional Budget Office’s (CBO) estimate. (see Table 1)
How will this work in practice? After accounting for certain regular “offsetting collections” that are achieved pursuant to appropriations law and that routinely act as credits against total funding, Congress will appropriate $772.7 billion in new base NDD activities—$69 billion above the statutory cap. In the same bill or bills, Congress will also make $53.7 billion in cuts in the same year, some real and some gimmicks that produce no actual reduction in spending. This will bring total base NDD funding, as scored by the CBO, down to $719.0 billion. Congress will then use the score of the offsetting collections from federal housing transactions under the OMB’s assumptions, rather than under the CBO’s, which will effectively create an additional $2.8 billion in offsets and bring the total down to $716.2 billion. Finally, Congress will designate $12.5 billion of that regular funding as “emergency” funding. Under budget law dating back to 1990, emergency designations automatically raise the budget caps by the amount of emergency funding in order to cover emergency costs—in this case, $12.5 billion, raising the budget caps from $703.7 billion to $716.2 billion. (see Table 1)
Cuts to the IRS will cause the side deal as a whole to lose money
In the Inflation Reduction Act, Congress appropriated $80 billion for the IRS, primarily to boost enforcement of the nation’s tax laws. This funding begins to reverse more than a decade of disinvestment in the IRS and has already begun to produce results by helping stem tax avoidance by the wealthy and large corporations and by improving service for ordinary taxpayers.
Rescinding this funding has been a priority for House Republicans; in fact, the first bill House Republicans introduced this Congress would have clawed back unspent funds. The original House Republican budget cap plan—the Limit, Save, Grow Act—also called for rescinding the IRS funding. In the FRA, $1.4 billion of this IRS funding was clawed back, and in the side deal that accompanied the FRA, the Biden administration and Congress agreed to rescind $20.2 billion of the funding, divided roughly equally over FY 2024 and FY 2025. (see Table 1)
The revised Schumer-Johnson deal announced in January rescinds all of the $20.2 billion in FY 2024 and is silent on FY 2025. Because most of the new IRS funding is targeted toward enforcement—ensuring that wealthy Americans and large corporations pay the taxes they legally owe—it more than pays for itself by boosting revenue collections. Conversely, rescinding this funding loses more in tax revenue than the spending cuts save.
Based on analysis of a similar CBO cost estimate, the $20.2 billion rescission would likely reduce revenue collections by at least $38.5 billion.*** Thus, the $32.5 billion in real spending reductions called for in the side deal (see Table 1), stemming from the IRS rescissions, combined with the real cuts to COVID-19 relief funding, would increase the deficit, not decrease it. In total, the $38.5 billion in deficit increases from lost revenues would be combined with $32.5 billion in deficit reduction from lower spending, for a net deficit increase of $6.0 billion.**** In other words, the net effect of the side deal would be to increase the deficit by weakening tax enforcement, thus reducing revenue collections, and clawing back COVID-19 funding.
Moreover, recent research by Boning et al. that looked at the direct and indirect effects of stepped-up enforcement on revenue collections estimated that the actual impact could be much larger. This research suggests that the IRS rescissions could cost as much as three times more than the CBO estimates in lost revenues, translating into $154 billion in lower revenue collections.*****
Repeating this deal in FY 2025 would require additional real cuts
Unlike the original side deal, the Schumer-Johnson side deal leaves total funding for FY 2025, as well as any side deal, undecided. The underlying NDD budget cap will grow by 1 percent from FY 2024 to FY 2025, from $703.7 billion to $710.7 billion. In the original side deal, the additional funding was also set to grow by 1 percent, from $69 billion to $69.69 billion, with the offsets and emergency designations nearly identical to those in FY 2024. (see Table 1)
In the Schumer-Johnson side deal, however, the IRS rescission originally slated for FY 2025 was moved up, as were some of the cuts achieved through COVID-19-related rescissions. At the same time, the Schumer-Johnson deal calls for fewer gimmick offsets and phony emergency designations. These changes leave a hole in the funding plan for FY 2025. If at that point Congress wants to match the revised side deal’s amount of real cuts in FY 2024, it will need to identify $27.7 billion in additional real funding cuts.******
Under this tight budget deal, the government will be forced to provide a lower level of services and benefits than it did last fiscal year, leading to less investment in the future and less assistance for needy families. Nonetheless, the Senate’s bipartisan work in marking up and reporting all 12 appropriations bills for FY 2024 shows that it’s possible to meet the nation’s highest priorities, even if some important programs are underfunded. It is critical that congressional appropriators work to make the most of every dollar available, placing people and their needs first.
The authors would like to thank Emily Gee, Brendan Duke, Jared Bass, Lily Roberts, and Laura Rodriguez for helpful suggestions, and Jessica Vela for both helpful suggestions and research assistance.
* There is no internal offset nor side deal to increase base defense discretionary funding; the statutory defense discretionary cap is simply set at the negotiated level. For FY 2024, that’s about 3 percent above the level enacted for 2023.
** This analysis assumes that all $6.1 billion of newly agreed-to COVID-19-related rescissions in the revised Schumer-Johnson budget deal produce real outlay savings. If some portion of that does not produce outlay savings, the portion of real cuts will be smaller.
*** The CBO estimate used in this analysis assumes that the IRS would reduce support for the least cost-effective efforts first. However, IRS Commissioner Daniel Werfel has indicated the agency’s intent to continue modernization efforts as originally planned until the funding provided by the Inflation Reduction Act runs out, effectively ending the stepped-up efforts supported by the act early. Because of this, the return on investment of enforcement is likely to be higher, and the IRS rescission is therefore likely to result in higher lost revenues later in the decade, unless Congress later restores funding.
**** This analysis assumes that all $6.1 billion of newly agreed-to COVID-19-related rescissions in the revised Schumer-Johnson budget deal produce real outlay savings. If some portion of that does not produce outlay savings, the net spending reduction will be smaller and the net deficit increase will be larger.
***** The CBO estimate used in this analysis assumes that the IRS would reduce support for the least cost-effective efforts first. However, IRS Commissioner Daniel Werfel has indicated the agency’s intent to continue modernization efforts as originally planned until the funding provided by the Inflation Reduction Act runs out, effectively ending the stepped-up efforts supported by the act early. Because of this, the return on investment of enforcement is likely to be higher, and the IRS rescission is therefore likely to result in higher lost revenues later in the decade, unless Congress later restores funding.
****** This analysis assumes that all $6.1 billion of newly agreed-to COVID-19-related rescissions in the revised Schumer-Johnson budget deal produce actual outlay savings. If some portion of that does not produce outlay savings, the total amount of real cuts in FY 2024 will be commensurately smaller, and thus the amount of additional real cuts needed to be identified will be smaller.