Tax Analysts Blog

The Power to Delay

Posted on Jul 29, 2013
“The power to tax involves the power to destroy.”

Chief Justice John Marshall’s famous phrase from McCulloch v. Maryland made it clear that if state governments had the power to tax the federal government, they could effectively impede or burden the implementation of federal legislation or the operation of the federal government. McCulloch is a seminal case on federalism and an important check on the use of indirect methods to undermine the Constitution and its system of separation of powers.

It might be time for another McCulloch-type decision today. Treasury and the IRS have appropriated to themselves the power to delay legislation. By broadly interpreting its authority to promulgate regulations, Treasury has twice in recent days decided that it could simply ignore a statutorily set implementation date. It should disturb observers that the two pieces of legislation that the executive branch is delaying just happen to be two of the most controversial pieces of legislation Congress has passed in the last few years: the Foreign Account Tax Compliance Act and the Affordable Care Act.

FATCA’s delay is a good deal less controversial than the delay of the employer mandate portion of the ACA. In both cases, Treasury is relying on section 7805(a), which says that the Treasury secretary “shall prescribe all needful rules and regulations for the enforcement of this title, including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.” Does that really include the power to ignore specific statutory mandates? In delaying FATCA, Treasury can also point to section 1474(f), in which Congress gave Treasury the ability to write “regulations or other guidance as may be necessary or appropriate to carry out the purposes of, and prevent the avoidance of, this chapter.” Again, though, it is unclear that writing regulations or other guidance grants Treasury the authority to frustrate a specific direction from Congress that FATCA should apply to all payments after December 31, 2012.

There is no such specific grant of authority in the ACA, and Treasury is standing on much shakier ground. Marie Sapirie argued in a July 29 article for Tax Notes that the analogies drawn by Mark Mazur, Treasury assistant secretary of tax policy, to support the delay were strained. Mazur compared the delay of the employer mandate to the delay of return preparer standards in the Small Business and Work Opportunity Act of 2007 and the delay in the collection of excise taxes in the Airport and Airway Extension Act of 2011. Sapirie argues that in both cases, the delays involved peripheral pieces of the law that were tangential to its main purpose (and that key members of Congress specifically asked for the delay in the airline taxes). That’s hardly the same thing as delaying the employer mandate of the ACA, a provision that is at the core of Obamacare. The CATO Institute called the delay illegal.

Treasury’s ability to delay the implementation of a law despite a specific statutory effective date is disturbing. On its face, it seems a clear violation of separation of powers. If the executive branch disagrees with a law passed by Congress, it can simply delay its effective dates indefinitely. What if Mitt Romney had won the 2012 election and was president today? Could he have simply decided to delay ALL of the effective dates for Obamacare, effectively repealing the law without the consent of the Democratic Senate? And Treasury’s willingness and ability to delay FATCA leads to fears about whether lobbyists will now get two bites at the apple. If they don’t like an enforcement bill moving through Congress, but fail to stop its passage, can wealthy, and possibly shady, stakeholders simply try again as Treasury and the IRS are drafting regulations? Laws have been effectively gutted by regulations in the past, but a complete suspension of implementation seems new, and much more dangerous.

Congress includes implementation dates in legislation for a reason. Usually it’s because lawmakers want a law to go into effect on a specific date. But it can also be because the calculation of pay-fors and revenue costs is heavily dependent on timing. Treasury and the IRS shouldn’t be able to set aside implementation dates and delay laws. The power to delay is the power to terminate. And the executive branch doesn't have the ability to peremptorily terminate a law.

Read Comments (2)

edmund dantesJul 29, 2013

I agree that the delays are illegal, and there are serious separation of powers
issues. However, I don't see anyone who has standing to sue. The harm is
general, not specific. The employers who've been excused from the mandate
aren't about to file suit to demand that it be applied to themselves.

Victoria FERAUGEJul 29, 2013

Mr. Scott, Thank for this article on a topic that is of great interest to me
and many others. FATCA a very poorly-written law and as it is written nearly
impossible to implement. If FATCA were to be put into force today, all the
non-US FFI's in over 160 countries would be facing a 30% withholding for being
non-compliant. Why are they not compliant? Because government must revise
their domestic laws and their banks must put into place cost and complex
information systems and new procedures before they can even hope to comply.
This takes time. Treasury is trying to make FATCA workable by signing
intergovernmental agreements with countries all around the world that would
make FATCA possible. Thus far it's not looking good and only 8 or 9 countries
have signed. If the US were to go ahead and unilaterally put FATCA into force,
it would be the equivalent of declaring financial war on the entire world. The
damage to the US economy would be on a scale I don't think any of us would like

It's a bad law. Congress never thought about the extraterritorial implications
when they voted for it. And the implementation (Treasury and the IRS trying to
"save" what it can) has been very badly managed. I did an "audit" on it thus
far on my blog if you are interested:

As you can see, it is a real mess.

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