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Biden aides offer IRS cuts to GOP, hoping to spare other programs

House Speaker Kevin McCarthy (R-Calif.) speaks with reporters about the debt ceiling negotiations on Wednesday.    (Jabin Botsford/The Washington Post)
By Rachel Siegel, Jeff Stein, Paul Kane and Leigh Ann Caldwell Washington Post

WASHINGTON – White House aides have floated trimming new money for the Internal Revenue Service as part of a debt ceiling agreement with House Republicans, eyeing the concession as a way to help shield the budgets for other domestic programs that the GOP wants to cut sharply, according to two people with knowledge of the matter.

Days before the United States could face a calamitous default, President Biden and lawmakers on Capitol Hill reported progress Thursday toward an agreement, even as wary liberal and conservative members of Congress criticized the few details that emerged publicly. Negotiators have been at loggerheads over GOP demands that would substantially cut federal spending on programs such as nutrition assistance, rental aid and scientific research, which White House aides fear could spark a revolt among Democrats.

Aiming to minimize those cuts, Biden aides have instead opened the door to repurposing some of the $80 billion approved last year for the IRS as part of the Inflation Reduction Act. It is unclear exactly how much the final agreement might strip from the IRS, but one of the people familiar with the matter said it is unlikely to be more than $10 billion. White House officials think the potential cuts would not compromise the administration’s goals to significantly improve enforcement actions against wealthy tax cheats and boost the agency’s customer service, according to a third person, who spoke on the condition of anonymity to reflect internal deliberations.

The concession could give House Speaker Kevin McCarthy (R-Calif.) a key victory to sell to his conservative base, which had already sought to remove the IRS funding. Any reductions in the IRS budget could also mean less savings, since increased funding to the tax collector ultimately reduces the federal deficit by bringing in additional revenue.

And any measure to reduce the IRS funding could alarm Democrats in Congress and around the country. But one person familiar with the matter referred to the IRS changes as likely minimal and a “fig leaf” to help McCarthy sell the deal to his base.

Still, Biden aides may see the concession as the least dangerous among bad outcomes. Depending on exactly what it means to increase border security, the military and veterans affairs, McCarthy’s demands would amount to cutting other domestic programs starting in October by at least 8% – or possibly as much as 12%, when adjusting for inflation, according to nonpartisan budget experts. White House officials do not want to accept dramatic reductions to programs they regard as essential in the lives of tens of millions of Americans.

“The President and his negotiating team are fighting hard for his agenda, including for IRS funding so it can provide better customer service to taxpayers and crack down on wealthy tax cheats,” Michael Kikukawa, a White House spokesman, said in a statement.

The government risks running out of money as soon as June 1 if the $31.4 trillion debt limit isn’t raised before then, Treasury Secretary Janet L. Yellen has warned.

On Thursday, Bloomberg and the Associated Press reported that Republicans might accept a lower increase in military spending than they initially sought. If so, and if a final deal reduces spending by about 1%, negotiators could be looking at cutting about $50 billion in spending from this year to next year. Allowing some of that money to come out of the IRS budget would make those cuts smaller.

“Under plausible scenarios, we could be looking at a cut to the domestic programs Democrats care most about in the range of $50 billion, or 7.5%,” said Tobin Marcus, a former Biden policy adviser now at Evercore ISI, an investment advisory firm. “Taking some of the IRS funding and putting it toward reducing those cuts could make a difference, but you’d need to use a substantial chunk of the $80 billion.”

The AP reported Thursday on the possibility of moving some IRS money to domestic programs in a debt deal.

Negotiators also made progress on including a measure to ensure that the government stays funded through 2024, said two people familiar with the matter, who spoke on the condition of anonymity to describe private talks. That plan was first reported by Punchbowl News. But lawmakers still had not publicly announced an agreement on what the overall funding level should be, even as budget experts across Washington tried to figure out potential compromises that would allow both sides to claim victory.

Lawmakers were also nearing agreement on how to advance permitting reform, but no consensus had emerged over Republican demands to impose work requirements for recipients of some federal aid programs. The emerging deal would raise the debt limit for two years – through the 2024 presidential election – while setting spending restrictions for the same amount of time.

“We know where our differences lie. We worked well past midnight last night. We’re back at it today, trying to get to the conclusion that can solve this problem,” McCarthy told reporters Thursday. “We’ve already talked to the White House today. We’ll continue to work. They’re working on numbers. We’re working on numbers.”

Biden said talks were moving along, adding, “I believe we’ll come to an agreement.”

“Speaker McCarthy and I had several productive conversations, and our staffs continue to meet as we speak and we’re making progress,” he said in the Rose Garden of the White House. “I made clear time and again, defaulting on our national debt is not an option.”

One of McCarthy’s chief lieutenants in the talks, Rep. Patrick T. McHenry (R-N.C.), told reporters the negotiations were “closer” but remained “sensitive.” He said he did not expect a deal to come together by Thursday night.

“I think we’ve had an airing from the White House, Democrats, by Republicans,” he said Thursday afternoon. “I think all those concerns are very well known, very well understood, and quite accounted for, which is the reason why we’re still here at the 11th hour, fighting about serious things of serious consequence.”

Negotiators had to contend with a group of hard-right Republicans who appeared furious that spending restraints wouldn’t be steep enough.

“Someone explain to me why that’s an off-ramp that should be taken now,” Rep. Chip Roy (R-Texas), an influential member of the far-right House Freedom Caucus, told reporters. “I think it’s an exit ramp about five exits too early.”

Some predicted a free fall of support for the final compromise beyond just the roughly three dozen far-right members of the Freedom Caucus.

“That would absolutely collapse the Republican majority for this debt ceiling increase,” Rep. Bob Good (R-Va.) said.

Also Thursday, Gen. Mark A. Milley, the chairman of the Joint Chiefs of Staff, warned that the effects of a default might threaten military readiness and national security.

“I think there’s no doubt whatsoever that there would be a very significant negative impact on the readiness, morale and capabilities of the United States military,” he said, adding that the nation’s reputation abroad would suffer.

Former president Donald Trump weighed in on the talks as well, saying at his golf course in Virginia that he had spoken to McCarthy.

“I think he’s doing a really good job. Tough situation,” Trump said. “They spent too much money – way, way too much money on nonsense. It’ll get worked out.”

Democrats have argued that Republicans allowed trillions of dollars in new debt to pile up during the Trump administration and are only now holding back on raising the debt ceiling because Biden is in office.

Even as negotiators say talks have been “productive,” they are in danger of running out of time.

Treasury officials say the government might be unable to cover all its payment obligations as soon as June 1. Other estimates say the “X-date” might come sometime in early June, but few analysts think there’s much more than a couple of weeks to maneuver.

Two prominent credit rating agencies warned that they could downgrade the U.S. government’s coveted AAA debt rating in the event of a default. Morningstar noted in a research report Thursday that it has placed U.S. debt in review “with negative implications,” noting that it could decide on a downgrade even if there is a deal. Fitch similarly said Wednesday evening that it is watching U.S. debt because of “debt ceiling brinkmanship.” Morningstar said it expected a deal and that any default would probably be over soon. A downgrade in 2011, when the nation narrowly averted a default, ended up costing more than $1 billion in higher interest in the following years.

If negotiators do reach an agreement, it would still need to be written into a bill and that takes time. House rules pushed by conservatives as McCarthy sought the speakership in January require 72 hours for lawmakers to review legislation before they can vote.

Both chambers would need to vote, which could take days. At that point, the deadline could be down to hours. On Thursday morning, Sen. Mike Lee (R-Utah) said on Twitter that any deal “will not face smooth sailing in the Senate” if it doesn’t include “substantial spending and budgetary reforms,” promising to “use every procedural tool” available to him to delay it.

The Senate is on a break, and McCarthy sent House members home Thursday for Memorial Day weekend, though they’d remain on notice to return if a deal comes together.

The administration’s negotiators – including Biden confidant Steve Ricchetti, Office of Management and Budget Director Shalanda Young and White House liaison to Congress Louisa Terrell – have stayed mum.

Other Democrats are continuing to worry about what an eventual deal might involve. In a Wednesday news conference held by the Congressional Progressive Caucus, its chair, Rep. Pramila Jayapal (D-Wash.), said she was concerned Biden would end up making concessions that she would not agree with.

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The Washington Post’s Dan Lamothe, Mariana Alfaro, Camila DeChalus, Rick Maese and Aaron Gregg contributed to this report.