House passes IRS funding cut amid shutdown pressure. The House passed a bipartisan appropriations package that would cut the IRS’s annual budget by 9 percent, reports Tax Notes (paywall). The bill, part of a two-measure spending minibus, would lower the agency’s fiscal 2026 budget to $11.2 billion from $12.3 billion in fiscal 2025 as lawmakers race to fund the government before the January 30 deadline. The measure would reduce funding for IRS technology and operations by $941 million, or 23 percent, and enforcement by $439 million, or 8 percent, while boosting taxpayer services by $256 million, or 9 percent. The impact of the cuts, if adopted, remains uncertain given the IRS’s remaining unspent Inflation Reduction Act funds, most of which are allocated to technology and operations.
Lawmakers advance barcode bill to speed paper return processing. Tax Notes reports (paywall) the Barcode Automation for Revenue Collection to Organize Disbursement and Enhance Efficiency Act cleared the House Ways and Means Committee on a 42–0. Under the bill, returns prepared electronically but filed on paper would include a barcode that converts data into electronic form, while other paper returns would be scanned using optical character recognition. Fewer than 7 percent of individual returns were filed on paper in 2023, representing roughly 10 million returns and amended filings.
States face tougher budget math heading into fiscal 2027. States entering fiscal year 2027 budget negotiations are confronting slower revenue growth and the impact of new federal policies. TPC’s Lucy Dadayan and Jon Schwabish share how revenue collections have cooled after a post-pandemic surge, while provisions of the One Big Beautiful Bill Act and tariffs are reshaping state tax bases. Many states are weighing whether to conform to federal tax changes, and whether to offset reductions in Medicaid and SNAP funding. Policymakers are also revisiting broader tax system design questions, including how to make revenue structures more resilient to economic and policy shocks.
Kentucky debates income tax repeal versus taxing high earners. Kentucky lawmakers are revisiting the future of the state’s income tax, with Republicans pushing toward full repeal and Democrats proposing higher taxes on top earners. The state’s income tax rate has already fallen from 6 percent to 3.5 percent under a series of trigger-based cuts. The debate comes as the state continues to evaluate whether revenue growth will sustain further rate reductions.
Georgia governor proposes fourth straight tax rebate. Georgia Gov. Brian Kemp (R) announced plans for a fourth consecutive state tax rebate during his State of the State address. Under the proposal, single filers would receive $250 and married couples $500, mirroring last year’s rebates. Kemp said the state has returned more than $7.5 billion in surplus revenue to taxpayers over the past four years, while acknowledging that rebates provide only temporary relief.
West Virginia weighs another income tax cut amid long-term gaps. West Virginia lawmakers are reviewing Gov. Patrick Morrisey’s (R) $5.493 billion budget proposal, which includes a planned 5 percent personal income tax cut and a push for a larger 10 percent reduction. Administration officials said the budget assumes a 5 percent cut costing about $125 million, while a 10 percent reduction would double that amount. A six-year forecast projects budget gaps beginning in fiscal 2028.
In observance of Martin Luther King, Jr., Day, the Daily Deduction will next publish Tuesday, January 20.
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