Pay-go could stymie efforts to end private tax program

Pay-as-you-go budget rules are bedeviling Democratic attempts to abolish an IRS program that uses private companies to collect overdue taxes.

Initially proposed by the Bush administration, the program was passed as an offset to tax legislation in 2004. At the time, the Joint Committee on Taxation (JCT) estimated it would fetch $1 billion for the Treasury over 10 years.

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But Democrats claim that taxpayers would save even more money if Congress killed the program and authorized funds for the IRS to hire more agents to collect the taxes.

“We think that the way the thing is scored in this particular instance creates a strange result,” said Rep. Chris Van Hollen. The Maryland Democrat, along with Rep. Steve Rothman (D-N.J.), has introduced legislation to repeal the program.

The problem is that non-partisan budget scorers like the JCT and the Congressional Budget Office (CBO) have not traditionally regarded funding increases to the IRS or plans to boost the agency’s efficiency as revenue raisers.

Van Hollen said legislative staffers were working on how to pass the bill without waiving pay-go rules. “We have to find a way to link the hiring of additional federal agents with the money saved to offset the losses,” he said. “It could go as a revenue raiser if they score it that way.”

The IRS awarded contracts to three companies in spring 2006 to go after the pot of back taxes, which are mainly small debts that the agency says it doesn’t have the resources to collect. The companies have turned over more than $15 million to the Treasury since they started in September.

More than 100 House members have signed on to the legislation to repeal the program, while Democrat Byron Dorgan (N.D.) has introduced a companion bill in the Senate.

Van Hollen predicted his bill would move as tax legislation, but he would not rule out de-funding the program in a spending bill.

Rep. José Serrano (D-N.Y.), the chairman of the Appropriations subcommittee that doles out funds to the IRS, also supports a repeal of the program. But due to pay-go rules he also would have to offset the revenue raised by the program to de-fund it for a year.

That won’t be easy. Next year, the program is projected to bring in $88 million.

The program’s critics, led by the National Treasury Employees Union (NTEU), argue that the IRS could collect the debts more efficiently because private firms earn up to 24 cents on every dollar they collect. By contrast, the IRS keeps 100 percent of the sums it gathers, minus salaries and other overhead costs.

Critics also raise concerns about privacy and taxpayer harassment. Rep. Charles Rangel (D-N.Y.), the chairman of the Ways and Means Committee, called the methods of private debt collectors “crude and rude.” He sent a letter to the IRS earlier this year asking the agency to hold off on any new contracts to the program.

Proponents counter that farming out a portion of the collection work to private firms is one of the best plans for narrowing the estimated $300 billion “tax gap,” a priority of the Democratic leadership.

A coalition of debt collection agencies and other firms has formed to lobby Congress to keep the program. It disputes the NTEU’s claim that the IRS costs the taxpayer only 3 cents on every tax dollar collected, arguing that the calculation also includes revenue from unrelated IRS initiatives such as drug seizure and refund offset programs — which, when added, inflate the efficiency of the IRS.

For the pool of debts targeted by the private debt collection program, the IRS cost is closer to 27 to 30 cents on the dollar, said a spokesman for the coalition, Dan Drummond.

Rep. Bart Gordon (D-Tenn.) sent a letter to his colleagues last month urging them to give the program a chance. He pointed out that the legislation for the program allows the IRS to use 25 percent of collected dollars to hire new IRS agents.
“The private debt collection initiative does not replace or eliminate IRS jobs,” he said.

But he acknowledged that he’d prefer to see the work done by the IRS. “The best thing to do would be to hire enough IRS agents to collect all the debt, but that’s just not going to happen,” he told The Hill.

Rep. Tom Reynolds (R-N.Y.) is fighting to keep the program because of the jobs it provides to his district. Pioneer Credit Recovery, a subsidiary of student loan giant SLM Corp., employs about 1,000 people in rural New York and is one of two companies currently contracted to collect the taxes.

“In my district, Pioneer Credit Recovery is a top-flight collection agency,” Reynolds said. “I want to save 1,000 jobs in western New York.”

The other firm in the program is CBE Group of Waterloo, Iowa. But unlike Reynolds, Rep. Bruce Braley (D-Iowa) said he hadn’t yet made up his mind on the legislation.

“I’m still studying the ramifications for people who work at CBE but also people who work for the IRS in my district,” he said.

On the Senate side, Sen. Chuck Grassley (R-Iowa), a longtime supporter of the program, poses the greatest threat to the Dorgan legislation. In a letter to colleagues last month, he argued that the program is necessary because the IRS lacks the “modern outbound call system” to go after the nearly $20 billion in tax debts that are lost each year due to the statute of
limitations.

“The IRS does not have such a system and building the infrastructure and training IRS employees on how to work such a program would take years if not decades,” he wrote.

Grassley also denied that private collection firms treat taxpayers roughly. He cited an IRS survey that reported 94 percent customer satisfaction for the private debt collectors versus 64 percent for IRS employees.