The rise of industrial policy means data synchronization is more critical than ever

Industrial policy is the hot new trend in D.C. policymaking circles, a Biden administration promise to radically transform the economy that is pouring federal dollars into green energy, infrastructure, and semiconductor manufacturing. While this transformation will place considerable demands on federal data infrastructure, the administration has taken up this challenge with its work to improve the level of disaggregation offered by national statistics and to account for environmental wealth in national accounts, to name just two new initiatives.

However, there’s a significant stumbling block before the administration’s plans for industrial policy. That stumbling block is how the U.S. tax code allows federal tax information from the IRS to be shared with statistical agencies. The U.S Census Bureau receives a broad grant of data, subject to approval by the Treasury Department. But our two other major economic statistical agencies—the Bureau of Labor Statistics (BLS), and the Bureau of Economic Analysis (BEA)—are not so lucky. BLS is shut out entirely, and BEA receives only corporate tax returns. This greatly hinders the production of federal economic statistics, but a proposal known as data synchronization would give both agencies grants of IRS data that would solve the most critical data problems.

The inability of BLS and BEA to use tax data has degraded U.S. national economic statistics in a number of ways. But perhaps most critically, it results in BLS and the Census Bureau maintaining two conflicting registers of U.S. businesses. These dueling registers disagree not only about how many business establishments there are in the U.S. economy, but also on trends within those sectors.

Take semiconductor manufacturing, the target of last year’s CHIPS and Science Act – one of the core pieces of the Administration’s new industrial strategy. The Census Bureau says there are about 3,700 U.S. businesses in “semiconductor and other electronic component manufacturing.” Data from BLS, however, indicate there are 6,000 U.S. businesses in that category nationwide. Meanwhile, the Census Bureau finds that there are fewer such businesses now compared to 2012, while BLS says there has been an increase of about 5 percent over that same time period.

BEA faces a different, but equally frustrating problem. The tax code grants BEA corporate returns that they use to calculate some of the nation’s most critical statistics, like Gross Domestic Product. Changes in the tax code, however, have increasingly pushed businesses to incorporate as pass-throughs, which means their income shows up on personal income tax returns that BEA does not have access to. Consequently, BEA is now looking at business income through a pinhole. More than half of that income is concealed from them and must be estimated.

These are just two of the many problems that could be fixed by data synchronization. Moreover, BLS and BEA have mandates to investigate the U.S. economy and provide actionable intelligence to policymakers, businesses, and the public. Federal tax data is a crucial resource for learning about the economy, and both agencies can better serve the public if they have access to this critical administrative data resource. At a time when the federal government is making historic investments into key sectors of the economy, it is critical that policymakers have accurate, timely data about the impact of these investments.

Data synchronization has been a goal of the statistical agencies and public data advocates for decades because it will vastly improve the quality of information available to policymakers and the public about the effectiveness of government programs. The Biden administration has recognized the importance of data synchronization by endorsing the proposal in each of their editions of the Treasury “Green Book” of revenue proposals. This is a great first step, but only Congress can make data synchronization real by amending the relevant section of the tax code.

Ultimately, federal agencies tasked with economic analysis cannot accurately assess the success of policies without consistent, high-quality data. The administration, together with the U.S. House Ways and Means Committee and the U.S. Senate Finance Committee, must prioritize action on data synchronization. Without this important federal data infrastructure fix, policymakers’ ability to evaluate the historic industrial policy investments will be fundamentally undermined.