At the heart of the Bush administration's replacement of federal prosecutors with politically faithful friends lies an interesting political puzzle. If you remove a qualified person from their position and replace them with an equally qualified political friend, have you actually done anything wrong? In other words, it could be possible for a "faithful Bushie" to take the place of someone who doesn't fit that description and still do a good job. If that happened, then it might be unethical to simply hand out plum jobs to your buddies, but at least those jobs get done well.
But what happens if the job isn't done well? What if it results in massive appropriations by the government and an overall loss of money? What if, by all accounts, job performance actually declined as a result of such personnel moves? Now suppose that we aren't talking about moving around political appointees, but replacing career civil service employees with contractors. At what point does questionable judgment become criminal?
These are the questions arising from the IRS decision to outsource collections to private firms. Authorized by the American Jobs Creation Act of 2004, money was appropriated in the 2005 budget for the IRS to contract with private collection agencies to collect unpaid taxes. The justification for using private agencies was plain. A U.S. Government Accountability Office report showed that since 1997, the gap between the number of back-taxes cases opened and the number closed has risen dramatically -- from practically zero to almost 40 percent. That same report showed the cause was also as plain -- the number of officers pursuing back-taxes cases has also declined from over 5,000 in 1996 to fewer than 3,500 by 2003.
The obvious fix for this problem would be to allow the IRS to hire some more people to chase down these cases. But, as in almost every other federal department, the answer at the IRS has been to turn to the private sector and outsource vital governmental services.
If that outsourcing resulted in improved tax receipts -- or even managed to break even -- then the preference for private contractors over civil servants or vice versa would remain an ideological question. But the IRS contractors have actually closed fewer back-taxes cases. This isn't a question of ideology, but a question of good government practices.
When New Jersey Democratic Congressman Steve Rothman asked at a recent hearing if the outsourcing program was recovering less than would be recovered by using the money to hire new IRS agents, IRS Commissioner Mark Everson replied, "I freely admit it." (Full disclosure: I am employed as a blogger for Representative Rothman.) Everson, however, refused to admit that a program that spent more to get back less was wasteful. Rothman was baffled. "You're costing more for the same job," he said. And Everson replied, "That's true."
But Rothman is being generous when he says the private firms are doing the same job. They are actually collecting less while getting paid more than the IRS. OMB Watch reports that the IRS could bring in eight times the revenue expected to be collected by private agencies for far less than the administrative fees charged by the private firms. No matter what objective measurement is used, outsourcing is a waste.
So why did the IRS outsource its collections? Simply put, Republican lawmakers refused to appropriate money to hire new IRS collectors and instead authorized expenditures for hiring contractors. This raises the question of why Republican lawmakers would willingly push for an outsourcing system that is less effective than the existing governmental system.
The answer is the same ideological blinder that allows IRS Commissioner Everson to say the method costs more, returns less, yet is not wasteful. The members of Congress who pushed the hardest for outsourcing received political donations from the owners of those companies that have received IRS contracts; there is at least the appearance of a conflict of interest and misuse of official position.
The IRS handed out contracts for 2006 to three companies: Linebarger, Goggan, Sampson, and Blair (from Austin, Texas); the CBE Group (based in Waterloo, Iowa); and Pioneer Credit (based in Arcade, New York). This Februrary, the IRS awarded new contracts to CBE and Pioneer that run through March 2008. The IRS announced, "The CBE Group and Pioneer Credit Recovery gained extensive experience in the first phase of the debt collection program and are well positioned to move the program forward." The third contract, with Linebarger, however, was not renewed. To date, no explanation has been given by the IRS for dumping Linebarger's contract.
Political donations are worth noting in this context. According to Political MoneyLine, Linebarger, et al. are major donors to the Democratic Party, they are huge donors. The firm has given thousand-dollar donations to the Texas Democratic Party in multiple years, and the firm's founding partner Dale Linebarger has also donated to at least seven Democratic candidates, including Hillary Clinton. To be fair, there were a few donations to a stray Republican (this is Texas after all), but the donations are overwhelmingly to Democratic Party organizations and candidates. Linebarger partners Thomas Goggan and DeMetris Sampson have similarly Democrat-friendly donation patterns. Only partner Jim Blair seems to have contributed greater sums to Republicans.
Meanwhile, the two firms whose contracts were renewed are Republican donors. CBE President Thomas Penaluna. While Penaluna hasn't been anything close to a "high dollar" donor himself, his political donations go 100 percent to Republicans, including Iowa Senator Charles Grassley.
Grassley has taken a personal stake in the privatization battle. When National Taxpayer Advocate Nina Olson submitted a report to Congress that stated, "the revenue benefits of the program are limited and the potential for taxpayer rights violations is significant," and recommended that the privatization program be axed, Grassley questioned her professionalism. He stated that the private collection agencies "have abided by the Fair Debt Collection Practices Act, the Privacy Act, and the Fair Credit Reporting Act, as well as the IRS Restructuring and Reform Act of 1998, which limits overzealous collection tactics by collection agents." This is despite Olson's contention that she could not provide adequate oversight because the agencies claimed that the debt-collection techniques used were "proprietary information". In a letter to Olson, the Iowa Senator asked that she "be more open" to the idea of privatized collections in the future.
The connection between CBE and Grassley, though, is tenuous; the connection between Pioneer Credit founder and chairwoman Kathleen Balus and New York's 26th District Representative Thomas Reynolds is not. In 2006, Balus gave Reynolds $2,000. She has also donated thousands of dollars to Republican PACs, several of which have given Reynolds hefty contributions. Balus cannot be characterized as anything but a high-dollar Republican donor. According to the FEC's donor database, her donations to mostly Republican candidates and causes (Tennessee Democrat Bart Gordon manages to keep the list from being totally Republican) have totaled $42,500. Meanwhile, Reynolds, who has benefited greatly from Balus's contributions, is the member of Congress who sponsored the amendment that gave the IRS power to begin outsourcing.
The connections don't stop there, though. Pioneer Credit's CEO, Joan Ludwick, has also donated to the Republican 21st Century PAC, The Freedom Project (another Republican PAC), and -- surprise -- Thomas Reynolds. Pioneer Chief Administrative Officer Caryn Benton has given to The Freedom Project and Thomas Reynolds.
Pioneer was started by Balus at her kitchen table, but was bought out in 2002 by Sallie Mae, the largest handler of college debt in the country -- and a generous donor to key Republican lawmakers. Employees of Sallie Mae have been the largest source of donations to House Minority Leader John Boehner's PAC, and 62 percent of the company's own PAC money went to Republicans in 2005 and 2006. Then there are allegations of insider trading by Sallie Mae Chairman Albert L. Lord, perhaps on information regarding President Bush's tax cut policy.
It needs to be said that there is no evidence of wrong-doing on any side. There is no smoking gun. But what we do have is Republican donors getting lucrative contracts with the IRS to lose taxpayer money -- and then funneling donations back into Republican coffers. What we have is a picture of business-as-usual in the Republican Party.
In many ways, that's even more damning. Representatives Rothman and Chris Van Hollen of Maryland have co-sponsored legislation that would end IRS use of private collection firms. Representatives Jose Serrano and Charles Rangel, both of New York, have stated that they intend to use the power of their committee chairmanships to end the practice. If this is just a bad program that was run badly, then Democrats are in position to bring an end to it.
But the privatization of the IRS it isn't "just a bad program" -- it's an indicator of a systemic problem with government outsourcing. It shows how private contracting is often not an ideological alternative to "big government," but simply a way politicians enrich their allies and encourage continued donations.
Thurman Hart works as an adjunct professor of political science at New Jersey City University and blogs for Rep. Steve Rothman at www.rothmanfornewjersey.com.
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