June 27, 2007

Arcane Budget Rules Create Problems for Federal Tax Collection

The budget process that governs how Congress funds public services and programs is geared towards keeping track of how much money is spent and how it affects the nation's fiscal situation. A particular spending bill or tax measure, for example, will be "scored" by the Congressional Budget Office, meaning an assessment will be made of how much money it will cost or gain for the federal government. Obviously provisions that raise taxes result in more revenue, while provisions that spend money results in less revenue.

But there are some situations where things get more complicated and the budget process might need some fine-tuning to deal with this. Funding for the IRS clearly results in a big gain, since that agency collects 98 percent of the revenue. The budget process does not recognize this, however. As a result of this and other factors, over the past few years Congress has cut funding for the IRS. (And let's face it, not many people are out there lobbying to protect IRS funding the way they lobby to protect other types of federal spending). This is clearly shortsighted, because every dollar you cut out of IRS funding can lead to several dollars lost in revenue. Anyone who managed a business this way would be considered insane.

As Bob McIntyre testifiedearlier this year before the Senate Budget Committee, "From 1994 to the present, the overall IRS budget has been slashed by more than a fifth, both as a share of the economy and in terms of the number of IRS employees compared to the total U.S. population... IRS audit rates, of both businesses and individuals, declined precipitously, especially for upper-income tax returns. In 1996, the IRS audited 210,000 returns of people reporting more than $100,000 in income. By 2001, the number had fallen to only 92,000 — even as the number of returns with incomes above $100,000 jumped by 80 percent."
Someone from the National Treasury Employees Union who works on this issue directed me toward the National Taxpayer Advocate's legislative recommendations which start out by noting that on a budget of over $10 billion the IRS manages to collect over two trillion dollars, a return-on-investment of about 210 to one. Increasing IRS funding, especially after budget cuts, can more than pay for itself. So it makes sense that former IRS Commissioner Charles Rossotti told the IRS Oversight Board in 2002 that assigning more revenue agents to debt collections could see a return of $30 to every $1 invested.

But Congress did not take Rossotti's advice. Instead, in 2004 Congress authorized the IRS to contract with private debt collection agencies to seek unpaid tax debts. One serious problem with this program is that the private agencies take a commission of 21 to 24 cents on every tax dollar they recover, while it's estimated based on Rossotti's figures that IRS staff could do the same work at a cost of just 3 cents on every dollar collected. The private debt collection program is totally irrational (unless you represent a state where one of the collection agencies is based).
As Congressional Quarterly reports, now Congress wants to cut off funding(sorry, subscription required) for this program. But apparently, the money the private debt collection program is projected to recover is recognized by the budget process while all the revenue that the IRS is projected to collect itself is not recognized by the budget process. So the private debt collectors could be scored as eventually paying for themselves, and the real tax collectors back at the IRS (who are far more efficient) are not.

What this means in practical terms is that defenders of the private debt collection program could attempt this week to block the bill to cut off funding because, it is argued, getting rid of the program will increase the federal budget deficit (which the budget rules are geared toward preventing). In the same appropriation bill that cuts funding for private debt collection, the IRS gets an increase for enforcement of $239 million and an increase for taxpayer assistance of $51.9 million (both of which will lead to more revenue collected) but none of this is "scored" as paying for itself several times over, which of course it will.

Apparently House leaders plan to bring the appropriations bill to the floor and either waive the rule as it concerns the private debt collection program or find some other procedural solution, which is sensible. But the more important lesson is that the budget rules are a little backwards when it comes to tax collection. IRS funding, as the National Taxpayer Advocate's legislative recommendations argue, should be dealt with under rules separate from the normal budget process.


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