The Possible Elimination of Chevron Deference: Potential Implications for Tax Revenue and Administration

April 8, 2024

The Possible Elimination of Chevron Deference: Potential

Implications for Tax Revenue and Administration

The Supreme Court has heard oral argument in the cases

Loper Bright Enterprises v. Raimondo and Relentless v.

Department of Commerce. The cases challenge the

constitutionality of a judicial doctrine known as Chevron

deference, which takes its name from the 1984 case

Chevron U.S.A., Inc. v. Natural Resources Defense Council.

This In Focus addresses some potential consequences for

tax administration, including effects on revenue, costs of

tax administration, and fairness and certainty for taxpayers,

if Chevron were overruled.

Loper Bright Enterprises v. Raimondo and Relentless v.

Department of Commerce could allow the Court to overturn

Chevron deference, which requires courts to defer to an

agency’s reasonable interpretation of an ambiguous federal

statute that the agency administers. See CRS Legal Sidebar

LSB11061, Chevron at the Bar: Supreme Court to Hear

Challenges to Chevron Deference, by Benjamin M.

Barczewski and CRS Report R44954, Chevron Deference:

A Primer, by Benjamin M. Barczewski for additional

background on Chevron deference.

Prior to 2011, not all lower courts agreed that tax

regulations were eligible for Chevron deference. In 2011,

however, the Supreme Court resolved the disagreement and

held that tax regulations were eligible for Chevron

deference in Mayo Foundation for Medical Education and

Research v. United States.

Potential Revenue Consequences

The federal tax code is complicated, and its subsequent

interpretation often requires the issuance of federal

regulations. Those regulations are crucial to determining tax

liability, especially for businesses and corporations.

Seemingly subtle differences in these interpretations can

have substantial effects on federal revenues.

In general, challenges to Treasury regulations are most

common where taxpayers contend they should owe less tax.

Where those challenges are successful, they tend to reduce,

rather than increase, federal tax revenue. If changes to

Chevron make it easier for taxpayers to successfully

challenge Treasury regulations, therefore, that could result

in lower revenues than Treasury would otherwise collect.

An Illustration: Cost-Sharing Rules for

Multinational Firms

Profit shifting by multinationals is estimated to cost tens of

billions of dollars in corporate tax revenue, as discussed in

CRS Report R40623, Tax Havens: International Tax

Avoidance and Evasion, by Jane G. Gravelle. The statute

governing the allocation of income and deductions,

contained in Section 482 of the Internal Revenue Code, is

general and brief, so the methods to allocate profits are

contained in Treasury regulations. See CRS In Focus

IF12524, Corporate Taxation: Profit Shifting, Transfer

Pricing, and Cost Sharing, by Jane G. Gravelle.

One method of profit shifting is cost sharing, where a U.S.

firm’s foreign subsidiary makes a buy-in payment to

existing technology, then shares in the costs of further

development for the right to a share of future profits.

In the 2019 case Altera Corp. v. Commissioner, Altera

challenged the 2003 Treasury regulation requiring related

companies engaged in cost sharing to also share the cost of

stock-based compensation. The Ninth Circuit, applying

Chevron, found that Section 482 was silent regarding the

method Treasury is to use to make allocations based on

stock-based compensation and that Treasury’s choice of a

method was a reasonable interpretation of the statute. If

Chevron were overruled, and if a future court adopted a

different interpretation of Section 482, it could result in

rulings that favored plaintiffs like Altera and, therefore,

considerably reduce federal revenues.

Tax Administration

Separate from influencing litigation outcomes, changes to

Chevron deference could also affect how agencies interpret

statutes when they promulgate regulations. Treasury may

have to rewrite its regulations more often to match statutory

interpretations provided by the courts. One survey found

that 88% of agency rule drafters either “agreed” or

“somewhat agreed” that Chevron made them more willing

to adopt “a more aggressive interpretation.” The loss of

Chevron deference, therefore, might lead Treasury to write

more taxpayer-friendly original regulations, which could

lead to less revenue.

A study of the shift to the broad application of Chevron

deference to tax regulations in 2011 identified specific

changes in how those regulations were written. According

to the author, Treasury’s rulemaking statements began to

focus more on policy issues and to engage more with public

comments. The shift to Chevron also appears to have

increased incentives to use the Administrative Procedure

Act’s (APA’s) notice and comment rulemaking, which may

make some interpretations eligible for Chevron deference.

The Internal Revenue Service (IRS) also changed its

manual to eliminate the statement that most regulations are

interpretive and not subject to procedural requirements

under APA. These findings suggest that Treasury devoted

more resources to promulgating regulations once tax

regulations were held to be eligible for Chevron deference.

Treasury may believe its use of notice and comment

rulemaking procedures increases its chances of receiving

https://crsreports.congress.gov

The Possible Elimination of Chevron Deference: Potential Implications for Tax Revenue and Administration

judicial deference and prevailing in challenges to its

regulations.

An Illustration: The Clean Hydrogen Production

Credit Proposed Rulemaking

A tax credit for the production of clean hydrogen was

enacted as part of P.L. 117-169 (commonly referred to as

the Inflation Reduction Act, IRA) to provide an incentive

based on the amount of hydrogen produced, the lifecycle

CO2 equivalent emissions rate of the hydrogen through the

point of production (well-to-gate), and other factors. The

act specified a general definition and model for calculating

lifecycle greenhouse gas emissions and delegated to the

Secretary of the Treasury the authority to produce

additional necessary regulations.

Treasury issued a notice of proposed rulemaking on

December 26, 2023. The proposed rule addresses how to

determine life cycle greenhouse gas emissions and how

taxpayers may use energy attribute certificates (EACs) to

qualify for the credit when using grid electricity. Treasury’s

interpretation of the rules for a qualifying EAC includes a

requirement that carbon-free sources must represent new

capacity (commonly referred to as additionality). Public

comments were extensive and have suggested that this

interpretation may limit the use of the tax incentive and

hinder the development of the clean hydrogen industry.

If Treasury adopts the proposed rulemaking as a final rule,

some taxpayers may challenge that rule as inconsistent with

the Inflation Reduction Act itself. Treasury’s explanation

for its interpretation, including its engagement with and

response to public comments, might support an argument in

favor of Chevron deference under current law. If Chevron

were overruled or limited, Treasury might have to

demonstrate not only that its interpretation was reasonable,

but that it had adopted the best interpretation of the IRA,

increasing the potential that a court would require a

different interpretation.

Taxpayer Certainty and Fairness

Treasury regulations can help taxpayers understand their

tax obligations. When enacted tax changes are made

effective on short notice, Treasury and the IRS issue

preliminary notices and proposed regulations that indicate

what the final regulations may look like. (Preliminary or

proposed regulations are generally subject to public

comment before they become final.) The importance of

preliminary regulations was illustrated in two recent major

tax reforms, P.L. 115-97 (from 2017, commonly referred to

as the Tax Cuts and Jobs Act or TCJA) and the IRA.

Among other changes, the TCJA disallowed or scaled back

a number of deductions, revised international tax rules,

altered cost-recovery provisions, reduced the corporate tax

rate, and allowed a pass-through deduction for

unincorporated business. To the extent these provisions of

the TCJA are ambiguous, Chevron deference makes it more

likely that Treasury can successfully defend the regulations

that it promulgates to implement them. In this way,

Chevron may support continuity and predictability for

taxpayers. On the other hand, Chevron deference also

protects Treasury’s discretion to advance a different

interpretation of the TCJA under a future Administration,

which may mean that tax regulations can shift from

Administration to Administration.

Congress might consider whether eliminating Chevron

deference would make tax administration more or less fair

to taxpayers. Critics of Chevron have argued that agencies

are not impartial, and that it is unfair for an agency to both

interpret a statute and enforce it. However, overruling

Chevron may increase the odds that different courts come

to different conclusions as to the meaning of the tax code,

because courts may be more likely to disagree about the

best meaning of a statute than whether the statute is

ambiguous. In this scenario, similarly situated taxpayers

could receive different treatment (violating the economic

principle of horizontal equity).

An Illustration: The Clean Hydrogen Production

Credit Taxpayer Comments

As described in the previous illustration, taxpayers

producing hydrogen at qualified clean hydrogen production

facilities may receive a credit based on a variety of

factors—including the amount of hydrogen produced and

the lifecycle CO2 equivalent emissions rate of the hydrogen.

Implementation of this provision was delegated largely to

the Secretary of the Treasury, and a notice of proposed

rulemaking was published on December 26, 2023. During

the comment period, which ended on February 26, 2024,

over 28,000 written comments were submitted.

Comments on proposed regulations serve multiple

purposes, including identifying unclear or confusing

language and revealing effects that may not have been fully

understood by those drafting the regulations. The extent to

which agencies feel compelled to respond to and

incorporate comments is driven by a complex set of factors,

including whether a court would consider the comment

“significant” and whether ignoring the comment could be

grounds by itself for a court to vacate the regulations.

Included in an agency’s calculus is whether the regulation

is likely to receive judicial deference, because an agency

may rely on its response to comments to demonstrate that

its interpretation of a statute is reasonable. Although there

are multiple incentives for agencies to address public

comments, it is possible that if Treasury could no longer

rely on Chevron deference, it could decline to use noticeand-comment rulemaking to interpret provisions like this,

or it could pay less heed to the many issues raised by

industry experts and others in the comments on the

proposed clean hydrogen regulations. Although Congress

has plenary power over taxation and could supersede

Chevron by prescribing its requirements directly in

legislation, as a practical matter, Congress may not

currently have the expertise to legislate a clear rule in every

tax situation that Treasury currently addresses through

regulation.

Jane G. Gravelle, Senior Specialist in Economic Policy

Donald J. Marples, Specialist in Public Finance

Benjamin M. Barczewski, Legislative Attorney

https://crsreports.congress.gov

IF12630

The Possible Elimination of Chevron Deference: Potential Implications for Tax Revenue and Administration

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