Tax Scheme

In late November, as the elephantine fiscal 2005 omnibus appropriations measure remained temporarily stuck in the grand sausage factory on Capitol Hill, National Treasury Employees Union President Colleen Kelley noted a "great irony" in the proceedings. The bill had come to a screeching halt because embarrassed legislators were struggling to tamp down a furor over an obscure provision that would have allowed appropriations committee staffers access to tax records.

Why had that provision generated such concern, Kelley wondered, when a potentially much more far-reaching measure regarding the tax system had attracted very little attention? That provision, approved several weeks before the omnibus bill stalled, allows the Internal Revenue Service to use private debt-collection companies to collect some of the estimated $120 billion (as of September 2003) in unpaid taxes that the agency believes it could be collecting if it only had the means.

Kelley's analogy was imperfect. While the debt-collection measure certainly opens the door to private sector use of tax information, it would limit firms' access to critical data such as names, addresses and amount of taxes owed, not full tax returns. And the private collectors would have to follow IRS rules protecting taxpayers from harassment. Still, one can forgive Kelley for hijacking the tax privacy debate, because in the process, she highlighted a more important issue: From a management and budgetary standpoint, outsourcing tax collection doesn't make a whole lot of sense.

Turning to the private sector for help in tracking down deadbeat debtors isn't an inherently bad idea. Forty states use private firms to help collect taxes, and at the federal level, the Education and Agriculture departments and the Small Business Administration work with bill collectors to go after delinquent loan recipients.

But that doesn't make private debt collection a great idea for the IRS. As in all issues of 21st century public policy implementation, judging the merits of the approach requires going through the often arduous process of determining exactly which mixture of government employees and contractors can best get the job done. Luckily, in the case of federal tax collection, almost everybody agrees it's a no-brainer: If you want more money, hire more government employees. Each IRS collections worker brings in an average of $900,000 more per year in taxes. The Treasury Department has estimated that the private collection experiment, involving the employees of 12 companies, will collect a total of $1.5 billion over 10 years.

So why go with the contractors? In a May 2004 report that addressed the then-brewing proposal to partially outsource collections, the Government Accountability Office hit on the answer: "IRS officials said that this proposal arose, in part, because of the belief that Congress was not likely to provide the increased budget to hire enough IRS staff to work on the inventory of collection cases." The numbers bear out that belief: Despite a steady increase in delinquent taxes, the IRS' collection staffing level has actually declined steeply since 1996, from about 5,500 employees to around 3,500.

None of this, of course, means that the IRS has done a poor job of preparing to outsource a portion of its collection efforts. The agency has learned a lot since a failed experiment with private tax collection in 1996. Under the new approach, collection agencies will be paid up to 25 percent of the amount they bring in, rather than simply receive a fee regardless of how effective they are. (Of course, as The Washington Post pointed out in a recent editorial, just a few years ago, the IRS was prevented from evaluating and compensating its own employees based on how much revenue they recovered.) And the IRS is outsourcing the low-hanging fruit by sending the easiest cases to the collection agencies. That means IRS employees can devote their time and energy to tougher cases, where the payoff is potentially larger.

Still, this qualifies as a prudent outsourcing effort only if one assumes that outsourcing is the sole alternative. Nobody seems to have absorbed the bigger lesson of the 1996 experiment: that the cost of supervising the private debt collection was greater than the revenue generated. With the proper supervision, companies might do better this time around. But in this and other cases involving how best to deploy government resources, if an obvious alternative-boosting the federal workforce-isn't even on the table, then everybody loses.