[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
H.R. 1870, THE CONTRACTOR TAX ENFORCEMENT ACT; AND H.R. 1865, AMENDS
TITLE 31 OF THE UNITED STATES CODE BY AUTHORIZING A PILOT PROGRAM FOR
LOCAL GOVERNMENTS TO OFFSET FEDERAL TAX REFUNDS TO COLLECT LOCAL TAX
DEBTS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
ORGANIZATION, AND PROCUREMENT
of the
COMMITTEE ON OVERSIGHT
AND GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
ON
H.R. 1870
TO AMEND TITLE 31, UNITED STATES CODE, TO PROHIBIT DELINQUENT FEDERAL
DEBTORS FROM BEING ELIGIBLE TO ENTER INTO FEDERAL CONTRACTS, AND FOR
OTHER PURPOSES
AND ON
H.R. 1865
TO AMEND TITLE 31, UNITED STATES CODE, TO ALLOW CERTAIN LOCAL TAX DEBT
TO BE COLLECTED THROUGH THE REDUCTION OF FEDERAL TAX REFUNDS
__________
APRIL 19, 2007
__________
Serial No. 110-31
__________
Printed for the use of the Committee on Oversight and Government Reform
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
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______
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COMMITTEE ON OVERSISGHT AND GOVERNMENT REFORM
HENRY A. WAXMAN, California, Chairman
TOM LANTOS, California TOM DAVIS, Virginia
EDOLPHUS TOWNS, New York DAN BURTON, Indiana
PAUL E. KANJORSKI, Pennsylvania CHRISTOPHER SHAYS, Connecticut
CAROLYN B. MALONEY, New York JOHN M. McHUGH, New York
ELIJAH E. CUMMINGS, Maryland JOHN L. MICA, Florida
DENNIS J. KUCINICH, Ohio MARK E. SOUDER, Indiana
DANNY K. DAVIS, Illinois TODD RUSSELL PLATTS, Pennsylvania
JOHN F. TIERNEY, Massachusetts CHRIS CANNON, Utah
WM. LACY CLAY, Missouri JOHN J. DUNCAN, Jr., Tennessee
DIANE E. WATSON, California MICHAEL R. TURNER, Ohio
STEPHEN F. LYNCH, Massachusetts DARRELL E. ISSA, California
BRIAN HIGGINS, New York KENNY MARCHANT, Texas
JOHN A. YARMUTH, Kentucky LYNN A. WESTMORELAND, Georgia
BRUCE L. BRALEY, Iowa PATRICK T. McHENRY, North Carolina
ELEANOR HOLMES NORTON, District of VIRGINIA FOXX, North Carolina
Columbia BRIAN P. BILBRAY, California
BETTY McCOLLUM, Minnesota BILL SALI, Idaho
JIM COOPER, Tennessee ------ ------
CHRIS VAN HOLLEN, Maryland
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
JOHN P. SARBANES, Maryland
PETER WELCH, Vermont
Phil Schiliro, Chief of Staff
Phil Barnett, Staff Director
Earley Green, Chief Clerk
David Marin, Minority Staff Director
Subcommittee on Government Management, Organization, and Procurement
EDOLPHUS TOWNS, New York, Chairman
PAUL E. KANJORSKI, Pennsylvania BRIAN P. BILBRAY, California
CHRISTOPHER S. MURPHY, Connecticut TODD RUSSELL PLATTS, Pennsylvania,
PETER WELCH, Vermont JOHN J. DUNCAN, Jr., Tennessee
CAROLYN B. MALONEY, New York
Michael McCarthy, Staff Director
C O N T E N T S
----------
Page
Hearing held on April 19, 2007................................... 1
Text of H.R. 1865................................................ 7
Text of H.R. 1870................................................ 3
Statement of:
Cornett, Mick, mayor, Oklahoma City, OK, representing the
U.S. Conference of Mayors; Barbara Ford-Coates, Tax
Collector, Sarasota County, FL, representing the National
Association of Counties and the National Association of
County Treasurers and Finance Officers; and Patricia Weth,
deputy treasurer, on behalf of the honorable Francis
O'Leary, treasurer, Arlington County, VA................... 65
Cornett, Mick............................................ 65
Ford-Coates, Barbara..................................... 72
Weth, Patricia........................................... 93
Kutz, Gregory D., Managing Director, Forensic Audits and
Special Investigations, U.S. Government Accountability
Office; Paul A. Denett, Administrator, Office of Federal
Procurement Policy, Office of Management and Budget,
Executive Office of the President; and J. Russell George,
Treasury Inspector General for Tax Administration.......... 17
Denett, Paul A........................................... 37
George, J. Russell....................................... 44
Kutz, Gregory D.......................................... 17
Letters, statements, etc., submitted for the record by:
Cornett, Mick, mayor, Oklahoma City, OK, representing the
U.S. Conference of Mayors, prepared statement of........... 68
Davis, Hon. Tom, a Representative in Congress from the State
of Virginia, prepared statement of......................... 113
Denett, Paul A., Administrator, Office of Federal Procurement
Policy, Office of Management and Budget, Executive Office
of the President, prepared statement of.................... 40
Ford-Coates, Barbara, Tax Collector, Sarasota County, FL,
representing the National Association of Counties and the
National Association of County Treasurers and Finance
Officers, prepared statement of............................ 74
George, J. Russell, Treasury Inspector General for Tax
Administration, prepared statement of...................... 46
Kutz, Gregory D., Managing Director, Forensic Audits and
Special Investigations, U.S. Government Accountability
Office, prepared statement of.............................. 19
Weth, Patricia, deputy treasurer, on behalf of the honorable
Francis O'Leary, treasurer, Arlington County, VA, prepared
statement of............................................... 95
H.R. 1870, THE CONTRACTOR TAX ENFORCEMENT ACT; AND H.R. 1865, AMENDS
TITLE 31 OF THE UNITED STATES CODE BY AUTHORIZING A PILOT PROGRAM FOR
LOCAL GOVERNMENTS TO OFFSET FEDERAL TAX REFUNDS TO COLLECT LOCAL TAX
DEBTS
----------
THURSDAY, APRIL 19, 2007
House of Representatives,
Subcommittee on Government Management,
Organization, and Procurement,
Committee on Oversight and Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 1:10 p.m. in
room 2154, Rayburn House Office Building, Hon. Edolphus Towns
(chairman of the subcommittee) presiding.
Present: Representatives Towns, Bilbray, Platts, and
Duncan.
Also present: Representative Ellsworth.
Staff present: Michael McCarthy, staff director; Velvet
Johnson, counsel; Cecelia Morton, clerk; John Brosnan, minority
senior procurement counsel; Edward Kidd and Kristina Husar,
minority professional staff members; John Cuaderes and Larry
Brady, minority senior investigators and policy advisors; and
Benjamin Chance, minority clerk.
Mr. Towns. Welcome to today's legislative hearing on two
bills related to tax collection. One bill is the Contractor Tax
Enforcement Act, which would prohibit award of contracts to
companies that are seriously delinquent in paying taxes. We
will also examine a bill introduced by Representative Tom Davis
of Virginia, which authorizes a pilot program of local
governments to offset Federal tax refunds to collect local tax
debts.
I ask unanimous consent that the gentleman from Virginia,
Mr. Moran, and the gentleman from Indiana, Mr. Ellsworth,
participate in today's hearing. Both have been working on the
issue we will consider today. Without objection, so ordered.
As American citizens file their taxes this week, they
expect the Government to enforce the tax laws fairly and
efficiently. Efficiency means that one part of the Government
shouldn't pay out money to people or businesses that owe tax
debts until those tax delinquencies are cured. Unfortunately,
the Government frequently writes checks to people, even as
their tax debts go uncollected. These two bills are designed to
stop that.
Contractors owe the Federal Government billions of dollars
in delinquent taxes. My bill seeks to close this tax gap. GAO
studies over the past few years have identified more than
50,000 contractors owing nearly $8 billion--that is B as in
boy--unpaid Federal taxes.
If the sheer size of those numbers doesn't take your breath
away, the details certainly will.
One of the largest categories of tax debts is unpaid
payroll taxes. These are amounts deducted from workers'
paychecks for Social Security, Medicare, and individual income
taxes, but never forwarded to the IRS.
Companies that don't remit these withholdings are
defrauding not only the taxpayer, but also their own employees.
Yet, these companies are receiving millions of dollars in
Federal contracts.
One alarming example involved a contractor that provided
services such as trash removal, building cleaning, and security
to U.S. military bases. Although the company had revenues of
over $40 million in 1 year, with over 25 percent of this coming
from Federal agencies, it owed outstanding payroll taxes and
defaulted on an IRS installment agreement. Meanwhile, the owner
was receiving a six figure income and had borrowed nearly $1
million from the business. The business also made a down
payment for the owner's boat and bought several cars and a home
outside the country.
The Contractor Tax Enforcement Act would stop these
egregious practices by requiring that tax compliance be a
prerequisite for receiving a Federal contract. This bill would
prohibit new awards to contractors who are seriously delinquent
in paying taxes and authorize the IRS to inform contracting
officers of the delinquency status of the applicants.
I realize the administration has proposed a rule that is
similar in many ways to my bill, but I do believe the
administration's proposal does not go far enough. For example,
it relies on self-certification by contractors that they are
complying with tax laws, but has no verification of this fact
through the IRS.
Based on the examples we have found, I don't think we can
simply take some of these companies at their word. With a
mounting Federal budget deficit and rising obligations, the
Federal Government cannot afford to leave billions of dollars
in tax revenue uncollected.
But these benefits of my bill go beyond just collecting
more money for the Government. The bill will provide a level
playing field for contractors that comply with our laws, who
have to compete with companies that have lower costs because
they are dodging their taxes. This is a serious concern that I
have heard from responsible contractors over the years who
support approaches like mine that target the bad actors, rather
than pose burdensome requirements on all contractors.
I look forward to hearing from our witnesses and gaining
their perspectives as we work together to find a workable
solution to something that we can all agree is a continuing
problem.
Let me say that I am pleased to co-sponsor this bill with
Tom Davis of Virginia, who, of course, has had a special
interest in this for a long, long time. It is my honor to work
with him on it.
[The texts of H.R. 1870 and 1865 follow:]
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Mr. Towns. At this time I would like to yield to the
gentleman from Indiana for remarks at this time.
Mr. Ellsworth. Thank you, Mr. Chairman.
I didn't prepare a statement, but I would like to thank you
for allowing me to join you today for such an important issue
and to talk about this subject.
When I had Mr. Kutz in my office a few weeks ago, one of
the first things, when I was elected to Congress, that really
caught my attention, the amount of outstanding taxes for people
that were still getting Government contracts. I don't think the
people in Indiana appreciate it. I pay my taxes, I am sure
everybody in the audience pays their taxes, and so should the
people that are receiving Government contracts.
I appreciate your letting me be a part of this hearing. I
look forward to the testimony.
Mr. Towns. Thank you very much.
It is a longstanding policy of this committee that we swear
our witnesses in.
[Witnesses sworn.]
Mr. Towns. Let the record reflect that all responded in the
affirmative.
Let me introduce the panel, and we will move forward.
Gregory Kutz is a Managing Director of the Government
Accountability Office. He leads GAO's Forensic Audits and
Special Investigations Unit, which conducts the most complex
investigations of fraud, waste, and abuse. Mr. Kutz has managed
GAO's work on contractors' abuse of the Federal tax system and
he has prior experience with financial and operational
management issues at the Internal Revenue Service.
Paul Denett is the Administrator of the Office of Federal
Procurement Policy at OMB, where he is the point person for the
administration on issues of Federal contracting and
acquisition. He has held a number of posts as a senior
executive in acquisition in the Federal Government and the
private sector.
Russell George is the Treasury Inspector General for Tax
Administration, which means he is responsible for audits and
investigations of the Internal Revenue Service. Before becoming
an Inspector General, he served for several years as staff
director of this subcommittee. Welcome back.
Your entire statement is in the record, gentlemen, of
course, and I would like to ask that each witness summarize
your testimony in the time provided. Of course, most of you
know how the light works. The yellow light means your time is
running down and getting close to the end, and the red light
means that you are now violating the rules and that you are
going overboard. We will try to be a little flexible and
generous with the time, but we do want you to be able to try to
get it in within 5 minutes.
I would like to clarify my remarks. Tom Davis has not yet
signed on as a co-sponsor of my bill, H.R. 1870, but I am
hoping that he will do it in the very near future. Of course,
knowing him, and he believes in good government, it is the kind
of bill that he would want to be identified with. Let me just
say that and leave it alone.
At this point I would like to start with you, Mr. Kutz, and
just come right down the line.
STATEMENTS OF GREGORY D. KUTZ, MANAGING DIRECTOR, FORENSIC
AUDITS AND SPECIAL INVESTIGATIONS, U.S. GOVERNMENT
ACCOUNTABILITY OFFICE; PAUL A. DENETT, ADMINISTRATOR, OFFICE OF
FEDERAL PROCUREMENT POLICY, OFFICE OF MANAGEMENT AND BUDGET,
EXECUTIVE OFFICE OF THE PRESIDENT; AND J. RUSSELL GEORGE,
TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION
STATEMENT OF GREGORY D. KUTZ
Mr. Kutz. Mr. Chairman and Congressman Ellsworth, thank you
for the opportunity to discuss Government contractors with tax
problems.
My testimony today summarizes our past work on Department
of Defense, civilian agency, and GSA contractors. Specifically,
our past investigations identified 27,000 DOD contractors with
$3 billion of unpaid taxes, 33,000 civilian agency contractors
with $3.3 billion of unpaid taxes, and 3,800 GSA contractors
with $1.4 billion of unpaid taxes. These numbers are
substantially understated because they exclude under-reporting
of income and non-filing of required tax returns, which we have
seen in certain contractors. According to the IRS, under-
reporting of income is the largest component of the over $300
billion net tax gap.
As part of our work we performed in-depth investigations of
122 of these contractors, including the owners, officers, and
any related companies. For all 122 cases, we found abusive and
potentially criminal activity related to the Federal tax
system. Many of these companies had unpaid payroll taxes,
which, as you mentioned, Mr. Chairman, represent amounts
withheld from an employee's wages for Social Security,
Medicare, and individual income taxes. Willful failure to remit
payroll taxes to the IRS is a felony.
Most of the individuals that we investigated have made
careers out of not paying their Federal taxes. Schemes used to
avoid paying taxes include: under-reporting of income and non-
filing of required tax returns; large cash withdrawals and
loans to owners and officers that were never repaid; closing
the entity with tax debt and opening another with a similar
name at the same address; and large cash transfers to foreign
bank accounts or to purchase a home in the Caribbean.
Some of the owners of the contractors that we investigated
were simply poor business managers. Rather than pay their
taxes, they chose to pay their utility bill or the rent.
However, many accumulated substantial personal wealth at the
same time they failed to pay their Federal taxes.
The posterboard shows examples of the multi-million-dollar
homes and luxury vehicles that we identified. They are also
shown on the monitor. Other interesting assets include: a
professional sports franchise, a shopping mall, a high-
performance aircraft, and a $25,000 men's bracelet.
Our current and past investigations have shown that failure
to pay Federal taxes isn't the only problem these individuals
have. For example, we identified substantial other debt,
including State and local taxes, personal income taxes, and
delinquent student loans and child support payments. Criminal
activity included assault, embezzlement, money laundering,
burglary, and check fraud.
The companies we investigated were typically small-to mid-
sized and closely held. Industries ranged from building
maintenance, construction, and manufacturing, to security,
weapons systems, and health care. Ironically, these potential
felons are doing business with the Department of Justice and
Homeland Security.
These facts bring us to the key question of this hearing:
what is being done to prevent the most egregious contractors
from doing business with the Federal Government? For the 122
cases that we investigated, the answer is nothing. Current
Federal law does not prohibit tax deadbeats from getting
Federal contracts.
In conclusion, we strongly support prohibiting contractors
with serious tax problems from doing business with the Federal
Government. It is a matter of fairness, ethics, and just plain
common sense. The vast majority of Federal contractors pay
their Federal taxes, and I expect they would support a law that
prevents tax cheats from getting Government contracts.
Also, if we can't trust these contractors to pay their
Federal taxes, then how can we trust them to secure Federal
buildings, manufacture parts for the space shuttle, and provide
health care to our wounded warriors?
Mr. Chairman, I believe most of your constituents would
find it hard to believe that the hard-earned money we collect
from honest American taxpayers is being used to bankroll
deadbeat Government contractors.
Mr. Chairman, this ends my statement. I look forward to
your questions.
[The prepared statement of Mr. Kutz follows:]
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Mr. Towns. Thank you very much, Mr. Kutz.
Let me yield to the ranking member at this time for any
opening statement or any comments he might have.
Mr. Bilbray. Thank you, Mr. Chairman. I apologize for my
tardiness, but the California Delegation, being a small,
intimate group of 53 members, can drag on sometimes.
I would like to say that this is an issue that we need to
address. If nothing else, we need to air the issue.
As somebody who grew up in a family that was involved with
a tax practitioner business, I always try to remind all of us
what the Government may think we owe and what we do owe many
times is two distinctly different things. I think we need to
make clear here that no one is proposing, hopefully, that we
pre-determine what somebody, even a contractor, owes without
the due process of the review process that the tax codes allow.
We are talking about people here who have basically ignored a
liability that has been adjudicated or authorized and
identified.
I think, Mr. Chairman, when we talk about people that feel
that the tax code doesn't apply to them, child support laws
don't apply to them, we are really talking about a segment of
society that really has promulgated this culture of corruption
that somehow everybody is breaking the rules so it is OK for me
to break the rules. I think that it is quite well within our
realm to consider the fact that being a contractor in any form,
let alone with Government and especially the Federal
Government, is not a right, it is a privilege, and that, even
if it was a right, those rights can be negated by the violation
of the law by not fulfilling the requirements, the minimum
standards of requirements that apply across the board to the
general population.
I look forward to working with you, Mr. Chairman, on this
item. I think that we need to make sure that a good idea
addressing a bad problem is implemented in the appropriate way.
In all fairness, as we address this concern, we have to
remember that not everything we do to address a grievous wrong
is the right thing to do. We have to do it the right way in the
right manner to take care of the problem without creating
bigger problems.
I really think that this is something that is long overdue
to be addressed. I appreciate the chance of your having this
hearing, Mr. Chairman. I look forward to the rest of the
testimony.
Mr. Towns. Thank you very much, Congressman Bilbray.
Mr. Denett.
STATEMENT OF PAUL A. DENETT
Mr. Denett. Chairman Towns, Representative Bilbray, and
members of the subcommittee, I appreciate the opportunity to
appear before you today to discuss how the Federal acquisition
system can be used to improve tax compliance by Federal
contractors.
The administration agrees with the subcommittee's goals to
reduce contractor tax delinquency and improve tax compliance.
This is a shared value and responsibility that requires
Government-wide attention, and, as the Administrator for
Federal Procurement Policy, I will discuss ways the community
is increasing compliance and address the practical issues
associated with implementing the proposed Contractor Tax
Enforcement Act.
Increasing tax compliance: following the February 2004,
report by the Government Accountability Office regarding
Defense contractors that abused the Federal tax system, the
Office of Management and Budget participated on the Federal
Contractor Tax Compliance Task Force to improve the sharing of
information between the Internal Revenue Service and other
Federal agencies, specifically the Department of Defense, for
the purpose of collecting unpaid taxes.
The Task Force, which has become a semi-permanent entity
dedicated to improving contractor tax compliance, made
significant and permanent improvements to policies and
processes that directly result in increased debt collection.
For example, IRS and other Federal agencies now share
information electronically to identify contractors that should
be subject to the Treasury Department's Federal payment levy
program. Delinquent contractors are identified, and their
Government payments levied. Alternatively taxpayer
identification numbers, TINs, that are entered in the central
contractor register data base, which is the Government's
principal repository for contractor banking information, are
validated to ensure that contractors subject to the levy
program are correctly identified, ensuring that the names and
TINs of the contractor match, increase the number of payments
available for levy.
The IRS is now using data from the Federal procurement data
system to identify contractors with outstanding tax debts,
which will assist the IRS in prioritizing future offset actions
and increase tax debt recovery.
Implementation of the proposed Contractor Enforcement Act:
as I understand it, the proposed Contractor Tax Enforcement Act
would prohibit delinquent Federal debtors, generally those who
have not paid the tax, penalty, or interest within 180 days of
assessment, from being eligible for Federal contracts. While I
fully support the objective of the bill to increase tax
compliance, I am concerned that implementation of this, as
written, would result in a de facto debarment executed without
regard to the suspension and debarment due process requirements
provided in the Federal Acquisition Regulation [FAR].
Suspension or debarment is a serious remedy designed to
protect the Government from conducting business with non-
responsible contractors when this is in the Government's
interest. The FAR establishes due process requirements to
preserve transparency and fairness and afford both the
Government and the contractor discrete rights throughout the
process. These rights are necessary to ensure that the
Government's interests are protected and that the nature and
seriousness of the contractor's action warrant suspension or
debarment. These decisions are made on a case-by-case basis by
an informed official, and a decision against a contractor is
not a punishment for non-responsibility but is a means for us
to protect the Government.
The proposed legislation appears to be inconsistent with
the established process for suspension or debarment; however, a
recently proposed change to the FAR provides much-needed
support for ensuring that tax delinquencies are properly
considered prior to contract award.
The proposed regulatory solution: on March 30, 2007, a
proposed change to the FAR was published in the Federal
Register. The proposed rule requires prospective contractors to
certify whether or not they have been convicted of or have had
a civil judgment rendered against them for violating any tax
law, failing to pay any tax, or have been notified of any
delinquent taxes for which the liability remains unsatisfied
within a 3-year period preceding the offer.
Additionally, the proposed FAR change adds the following
list of causes for debarment or suspension: delinquent taxes,
not restricted to Federal taxes, about which the offer has been
notified and that remain unpaid; unresolved tax liens; and
convictions or civil judgments for violating tax laws or
failing to pay taxes.
Once this rule is finalized, the appropriate Federal
officials may used tax delinquency as sufficient grounds for
debarment or suspension, in accordance with the established
process in the FAR for protecting the Government's interest.
Mr. Chairman and members of the subcommittee, OFPP is
committed to ensuring that Government contracts are awarded to
responsible, law-abiding contractors who take their tax
obligations seriously. The acquisition community is taking
affirmative steps to raise the visibility of contractor tax
delinquency, improve the ability of the Government to recover
that debt, and ensure that contractors seeking Federal business
disclose their tax liabilities and are accountable for their
tax delinquencies.
I feel the progress we have made as a community and the
proposed change to the FAR preclude the need for the additional
legislation.
This concludes my remarks. I am happy to answer any
questions you may have.
[The prepared statement of Mr. Denett follows:]
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Mr. Towns. Thank you very much, Mr. Denett.
Mr. George.
STATEMENT OF J. RUSSELL GEORGE
Mr. George. Thank you, Mr. Chairman. Let me at the outset
say it is truly an honor to be here to work with your
committee. As you noted earlier, I was staff director of this
subcommittee over 12 years for approximately 7 years under the
chairmanship of Steven Horn. It was truly an honor to work with
you. Mr. Bilbray, we held field hearings up in your District,
you may recall, and Mr. Platts, also, since we have interacted
in my capacity as IG.
You are considering very important legislation that you may
recall that we looked at the issue over 7 years ago in 2000
when Mr. Turner of Texas approached Mr. Horn about this very
important area. I am so glad that you are bringing it back up
today, sir.
I thank you for the opportunity to testify--Mr. Ellsworth,
it is nice to meet you--on two legislative proposals related to
tax collection. The policies embodied in them have the
potential to affect efforts to increase voluntary compliance,
as well as enforced revenue collection.
As mentioned, the contractor tax enforcement act would
effectively make any person with an outstanding Federal tax
debt ineligible to enter into a contract or to receive a loan
from a Federal agency. In February 2006, the IRS estimated
that, based on tax year 2001 data, the annual gross tax gap due
to under-payment of taxes is $34 billion. Collecting additional
taxes owed from potential Federal contractors could provide
another means to help reduce the annual tax gap attributable to
under-payment of Federal tax obligations.
This compliance check would also appear to support the
Secretary of the Treasury's comprehensive strategy for reducing
the tax gap.
Contractors receive an estimated $378 billion in Federal
payments annually. It is for Congress and for the Department of
the Treasury to consider whether, as a policy matter,
eligibility for Federal contracts and loans should include tax
compliance requirements.
While my office has not performed work directly on this
matter, our limited review of such requirements in other
contexts would lead us to anticipate that the impact on the
IRS's other tax administration efforts should be minimal. This
assumes that the proposed requirement is implemented in a
manner similar to IRS's current practices.
The other draft bill before this subcommittee this
afternoon would amend Title 31 of the United States Code to
create a pilot program to examine the feasibility of collecting
certain local tax debts. This proposal has the potential to
assist local governments with their collection efforts based on
experiences at the Federal level.
The Internal Revenue code requires that a taxpayer's
overpayment be applied to any outstanding child support or non-
tax Federal debt prior to issuing a refund or accrediting an
overpayment to a future obligation. However, a tax overpayment
must be offset to an outstanding tax debt before it may be
offset to non-tax debts or applied as a credit to a future tax
period.
The IRS has facilitated these offsets since 1984. In 1996
this committee moved the Debt Collection Improvement Act, which
authorized the Treasury Department to consolidate its offset
programs. Starting on January 11, 1999, the Department's
Financial Management Service, Treasury Department's Financial
Management Service, began refund offsets to pay outstanding
child support or Federal agency debts, while offset of Federal
tax refunds for State income tax debts began in January 2000.
Since 1996, this program has collected $24 billion in
outstanding debts. For example, in fiscal year 2005 the program
collected $3 billion. Of that total, 90 percent of the
collections were for overdue child support, Federal non-tax
debt, and State income tax debt.
Given the nature of the proposal under consideration, it is
unlikely that its enactment would adversely affect the IRS or
Federal Tax Administration. The proposal would establish a
pilot program for past due, legally enforceable local
government obligations. If current practice in analogous
circumstances is an accurate indication, it is likely that the
proposed pilot program would operate through the Treasury
offset program, and therefore affect the Financial Management
Service but not the Internal Revenue Service.
Mr. Chairman and members of the subcommittee, thank you for
the opportunity to provide background. I look forward to
answering your questions.
[The prepared statement of Mr. George follows:]
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Mr. Towns. Thank you very much.
Let me thank all three of you for your testimony.
Let me begin with you, Mr. Denett. What is it that you do
not like about the legislation?
Mr. Denett. I don't like the fact that it deprives
contractors of the due process that they normally would be
afforded before they, in effect, were suspended or debarred, by
prohibiting them from getting awards that, in effect, is like a
debarment. We have careful steps where they have an opportunity
to explain their side of it, go over the pros and cons, make
sure everything is on the up and up before a decision is made
to debar them so that they will not be able to get the award.
Systems have errors in them and they are imperfect, and I
would hate to deprive anybody of an opportunity to explain
their side of it before we made the decision that they would
not be allowed to receive any contract from the Federal
Government.
Mr. Towns. This would only apply to people who have
actually received information in the course of due process
taking place, and also we are talking about up to a certain
amount, as well. I mean, you still think that we should do
something else?
Mr. Denett. I do. Again, we have been through this for many
decades, a formal debarment process. I personally have been
involved with a debarment process with several companies and,
in fact, have debarred people. In the process of hearing
directly from attorneys and companies, the circumstances
involved with various things they are accused about, facts come
out that you otherwise are not fully privy to, and you need to
consider fully both sides before you take a significant action
of barring them from any Government business.
Some of these companies are small business. If they don't
have the opportunity to earn Federal dollars, they may not even
be able to meet repayment schedules with IRS if they no longer
have any income.
Mr. Towns. I guess you heard Mr. Kutz' testimony when he
talked about in terms of the buying of boats, he talked about
buying of luxury cars and homes and still not paying the taxes.
I mean, I know you suggest a case-by-case basis, but that seems
not to be working.
Mr. Denett. Well, it is improving, and we collected $55
million through the levy program. Now that they are tapping
into the FPDS there is going to be more and more matches. In
Defense Department they are allowed to levy 100 percent of the
money that is going to them through contracts. On the civilian
side I think it is 15 percent. I think legislation may be
ultimately proposed--I don't know if it is currently--to take
100 percent of money going to civilian contractors. I think all
of that is a positive. It is a way to collect money. I find it
deplorable when I see big houses and luxury boats and all that
and people owe money. I mean, that is wrong. I am glad----
Mr. Towns. Especially this time of the year when I have to
pay mine. I pay my taxes.
Mr. Denett. I agree with you. I pay mine, too.
Mr. Towns. But doesn't it bother you when you hear about
similar names at the same address, and, of course, they just
change the name and continue to do business? Doesn't that
bother you?
Mr. Denett. Yes, it does bother me. I mean, I think it is
wrong, and as we go through the due process I am describing, in
those cases where they can't demonstrate that they should
continue to get any Government business, they would be debarred
and suspended and they would not get any further Government
business.
Mr. Towns. Mr. Kutz, I would like to hear your comments on
this.
Mr. Kutz. Well, a couple of things. I mean, the people we
are talking about here are fraudsters. These people are
involved in tax fraud, basically. With respect to due process
on the tax side--and I think the ranking member was talking
about this--while I talked about the billions of dollars we
found, that was agreed-to taxes. That was not disputable taxes.
You have compliance assessments, as they are called, that are
not agreed-to taxes. Everything that I talked about was taxes
either agreed to by the taxpayer or determined in the IRS's
favor in a court of law, so the due process has happened.
Mr. Towns. Happened.
Mr. Kutz. I don't think necessarily the only solution to
this is to go through the debarment process. Mr. George
mentioned the Treasury offset program. You have tax and non-tax
debt in that Treasury offset program that potentially one
possible solution could be to systematically bump that against
the central contract registry and show a notification to the
central contract registry that someone is not eligible for a
contract because they have a tax debt. So there are a lot of
ways to do it. I think the implementation, there are a lot of
ways to implement this. Hopefully at the highest level we can
agree that we want to get these people out of the system. I
think that is the key part of this testimony. There are various
ways you can actually do it.
The progress also that was discussed is a lot of back-end
process. The levy program is where we are actually after--they
are in the system and being paid. We are collecting a couple of
pennies on the dollar at the back end, which I think we need to
continue to do, regardless of what we do at the front end. But
the purpose of this hearing today, as I understand it, is to
talk about the front end of the process.
Mr. Towns. Right. My time has expired, so I am going to
yield to the ranking member.
Mr. Bilbray. Thank you, Mr. Chairman. Mr. Chairman, let me
just echo your concern about the changing names. As we are
addressing this, we have to remember how some of these people
operate in being able to avoid it. We have seen that, the
abuses in the women in minority owned businesses and the way
they use front people to be able to hide, basically, who is the
power or the base, and that is going to be a big concern.
I think that when you talk about practical application, we
are going to have to figure out how do we track these people
and who are they. Can they get around? Are their Social
Security numbers there? Do we have a way of tracking who is
actually the contract and who is not?
Mr. George, you mentioned the issue of the offset from the
Federal tax refunds, the 1865, and the potential for the
collection there. Do you have any kind of number that we can
grasp on that issue? Do you have an estimate at all of the kind
of revenue source it could create for the local government if
we can go back and tap that?
Mr. George. As I noted in my written testimony, GAO has
estimated, as Greg, I believe, indicated, that DOD, which
serves as its own dispersing agent, collected at least $100
million in unpaid taxes in fiscal year 2002. If it worked with
the IRS, we estimate that at least that amount of money could
be added.
Mr. Bilbray. How much was that again? I am sorry.
Mr. George. We are estimating that $100 million in unpaid
taxes in 2002 could have been collected if DOD had worked with
the IRS to effectively levy contractor payments.
Federal Government contractors receive an estimated $377
billion in Federal dollars, alone, but as for the local
governments, the Treasury offset program has collected, since
the Debt Collection Improvement Act was passed in 1996, $24
billion.
Mr. Bilbray. So we are talking about a nice----
Mr. George. A significant amount of money. No question
about it.
Mr. Bilbray. Nice bundle.
Mr. George. It is.
Mr. Bilbray. I would just say to my colleagues, when we
talk about issues like local government having first responder
capabilities for homeland security and we talk about grants and
providing Federal funds to local governments, here is an
example where, if we just cooperate with them, we can help them
get their own money back, and within their own jurisdictions,
without all our strings and oversight problems that we have
with the Federal Government, and to get the job done and
protect the citizens by making sure that those who should be
paying are finally paying the local communities, which really
are the front line service providers for our citizens, contrary
to what we like to think about here in Washington.
The challenge I have is that your concern about innocent
people getting caught or being disbarred, or whatever. Can you
see a way for us to make sure that doesn't happen? We are
talking about somebody basically whose due process has been
executed. The challenge is that we have misidentification of
the individual? Does somebody get hit there? What is your
concern there? And do you have any answers for this legislation
to make the implementation of this legislation practical?
Mr. Denett. Well, again, I think the new regulation that is
on the street now--we are collecting comments from industry and
the citizenry--will be a major step in the right direction,
because heretofore we did not list all these tax things as a
specified reason for debarment and suspension, so this will
facilitate making those calls. A step in the right direction.
I think the IRS and others now tapping into the Federal
procurement data system to see all of this nearly $400 billion
awarded every year, any that have tax problems it will put
flags on them and we will start to collect that money from
them. Instead of them getting the check, in he Defense
Department's case they can take 100 percent of the check.
Civilian agencies is 15 percent, but being considered to go up
to 100 percent. I mean, that is substantial and will be a major
improvement over what we have been doing in previous years.
Is it enough? I don't know. I think we need to get public
comment and then try it and see what success we have with it.
Mr. Bilbray. Mr. Chairman, just in closing, it tends to be
a habit around here that we need props, and props are great for
sending a message. Frankly, I don't care how big a house
somebody has if they are skipping out on their taxes. I don't
care if it is a little shack they are living in and they are
drinking or taking drugs and there is no symbolism there.
I don't care if they are living in poverty. If they are not
paying their fair share of taxes and they are competing against
a business that is trying to get a contract that is paying
their fair share of taxes, common decency says we have to quit
rewarding the people that are breaking the rules and not paying
their taxes, because that, de facto, punishes those who are
playing by the rules.
Even if the guy playing by the rules lives in one of those
big houses, he still has a right to be protected from unfair
competition from those who aren't playing by the rules.
I yield back, Mr. Chairman.
Mr. Towns. Thank you very much.
I yield to the gentleman from Indiana, Mr. Ellsworth.
Mr. Ellsworth. Thank you, Mr. Chairman.
Is it a 5-minute rule?
Mr. Towns. Five minute rule, yes, unless you are the
chairman or the ranking member.
Mr. Ellsworth. OK. I will keep an eye on my $29 men's
bracelet I have on here, my Timex.
Mr. Bilbray. Guess who is making the rules?
Mr. Ellsworth. Thank you very much.
I will ask you the first question. This is probably a
pretty easy one. A person who knows they are going to not pay
their taxes, would that not give them an advantage in a bid
process if they knew on the end that they could low-ball that,
knowing that they were not going in? Would you find that to be
the case?
Mr. Kutz. Yes, not just theoretically but in reality. We
did drill down upon specific cases of especially wage-based
industries where that had happened and taxpaying contractors
were beat out by those that didn't pay their payroll and income
taxes.
Mr. Ellsworth. Mr. Denett, you talked about a self-
certification process that was in the works or in the hopper,
you are thinking about implementing that. Is there a time? I
have penned some legislation that did that. Is that on a
timeframe that would be in place and implemented?
Mr. Denett. It is on the street for comments now, published
in the Federal Register. Comments are due by the end of May. We
don't know if we are going to get ten comments or a thousand
comments, but the normal cycle of reviewing the comments and
then getting it finally issued, I would estimate we would have
a rule out by November, perhaps sooner, based on my increased
sensitivity to this subject and hearing some of what I am
hearing today. It disturbs me also, so I am going to be as
aggressive as I can be with getting it implemented.
Mr. Ellsworth. I hope the commenters have to identify
themselves, or we only get the ones from the contractors that
are doing this. You are going to get a one-sided thing.
I will go ahead out on a limb here and say that the people
in Indiana, I can comment for them that they would like the
people also paying their taxes and fairly before they got
another contract.
We talked about not doing this, that we wouldn't want
anybody to not be awarded a contract unfairly. Do you have any
numbers, the percentage of those that we have found that we
checked on or held back from receiving a Federal contract that
we then found that we were in the wrong, the Government was in
the wrong and held them back unfairly, a percentage of how
often that happens when we don't award a contract because they
haven't paid any? Do we have examples of that where that has
happened?
Mr. Denett. I do not have any statistics on how often that
happens.
Mr. Ellsworth. So you based your comments on we sure
wouldn't want that to happen, so that is why we are not--I
guess I am gathering here, when you said we wouldn't want
anybody to go in default or not be awarded a contract if we
found a mistake, that has not happened?
Mr. Denett. I am told by various departments that this, in
fact, has happened, but I do not have any specific example with
me today, nor do I know what small percentage of times that, in
fact, does happen.
Mr. Ellsworth. But it would be small, a small percentage?
Mr. Denett. Yes. That would be my guess.
Mr. Ellsworth. OK. And, Mr. George, I will go to you. I am
still in the green. I might get a couple more in.
In my former life in law enforcement we could find carpet
fibers and DNA when we looked for them, and I am guessing that
Jag and those big homes would be pretty easy to find, and I
agree with the gentleman that I don't care what size house it
is or what car. But how do you triage who you go after when you
find these violations? I know it is going to cause your
organization a burden to increase and roll it up, but wouldn't
this money we take in help offset your costs or new employees?
I am guessing we could hire quite a few employees for what we
can make up.
Mr. George. Mr. Ellsworth, that is a very good point. In
similar programs that the Treasury Department operates--again,
obviously not dealing with contractors--they are allowed to
assess fees to the people from whom they collect the money, and
in some ways that helps offset or pay for the activity that the
Government has to engage in. But it is important to note, too,
that, depending upon how the contractor is organized, whether
it is through an incorporated organization or whatever so they
are going to be very aggressive, innovative in ways to help
bring that about. That is something that I would request that
this subcommittee consider.
Mr. Ellsworth. Would the self-certification that Mr. Denett
was talking about then help solve that? Would that then, if
they were found in violation when they self-certify, then they
go to jail?
Mr. George. Well, honest thieves who self-certify it would
help, but the dishonest ones----
Mr. Ellsworth. And then go to jail if they are caught self-
certifying when that was not the case?
Mr. George. Well, I am not sure whether it require jail
terms.
Mr. Denett. There are criminal penalties for anybody who
falsely certifies that information.
Mr. Ellsworth. OK.
Thank you, Mr. Chairman. Sorry for going over.
Mr. Towns. Thank you very much.
At this time I yield to the former chairman of this
subcommittee from Pennsylvania, Mr. Platts.
Mr. Platts. Thank you, Mr. Chairman. I appreciate your
holding this hearing. Does the 5-minute rule apply to former
chairmen? I will try to stay within the 5-minutes here.
I do appreciate your holding the hearing and all of our
witnesses. I think this is an issue that needs to be addressed
head-on and is something that we didn't get to on our list, and
I am glad that the chairman is taking the lead on it now with
the new session.
The numbers to me are staggering, as one who does my best
to pay every penny I owe and use an accountant to make sure it
is right, that we have people doing business with the Federal
Government that aren't.
I think a very important line is in the GAO report that
says, Federal contractors that do not pay taxes could have an
unfair competitive advantage in cost because they have lower
cost than the tax-compliant contractors on Government
contracts, because if you are paying your taxes you factor all
that into your bid. The guy that is shorting the Federal
Government isn't, so he gets the job and he is the one being
unscrupulous to begin with.
I do have a couple of quick questions. The numbers
addressed, the $3 billion, and if you total it up I understand
maybe some of it is over 63,000 different contractors, DOD
contractors, 33,000 civilian and agency contractors, and
another almost 4,000 GSA, that $3 billion is from throughout
the Federal Government, not just DOD contracts?
Mr. Kutz. We did three different pieces. We did Defense,
civilian agencies, and GSA.
Mr. Platts. So the $3 billion is the total of all of them?
Mr. Kutz. No. There is $3 billion, $3.3, and $1.4, but
there is overlap, so I would say at the end of the day you are
talking about between $5 billion and $10 billion, but it is
difficult to know. And keep in mind that is the known part.
Mr. Platts. Right.
Mr. Kutz. We said those are agreed-to taxes.
Mr. Platts. Right.
Mr. Kutz. It is very likely the bigger part is the unknown
part.
Mr. Platts. Right.
DOD certainly has not done a very good job, and, as is
referenced in Mr. George's testimony, in the 2002 fiscal year,
where if they had worked more effectively with IRS, could have
recouped it, and clearly haven't been very efficient.
Is there any department or agency that stands out as doing
a good job of making sure--DOD I think is an example of what we
don't want to do. Is there an agency or department that, in
dealing with contractors, is doing a good job?
Mr. Kutz. Well, if I could address that, then Mr. George
could followup with that, but what Mr. George was talking about
was the back end of the process. This is levying contractors
already in the system and taking 15 percent typically of their
payments. No one was doing a very good job of that in the early
2000's. That is where most of the progress has been made, as
Mr. Denett described. And there has been good progress. We are
collecting now at least tens of millions, and over times
hundreds of millions and billions on the back end of the
process.
No one on the front end of the process is doing anything
about the 122 cases I talked about. They all got in the system,
basically----
Mr. Platts. So still today there is no one to point to?
Mr. Kutz. No. These people can get in the system today.
Again, with respect to the self-certification, one point I
would add is that these people are not voluntarily paying their
taxes in a voluntary system. What leads us to conclude that
they are going to voluntarily say I have a tax problem.
Mr. Platts. Yes. And I think that is right on point. If
they are being unscrupulous in paying what they owe, the
likelihood--I think it is important to point out in the
legislation that for this background in large contracting to
occur, I mean, the information shared by Treasury to the
relevant department or agencies, because the person coming
forward for the contract authorized the information to be
shared. So if you don't want to have this tax issue addressed,
you have that choice of not pursuing the contract, but if you
pursue the contract, then under this bill you are going to
authorize the Secretary of the Treasury to disclose your tax
status, so you are agreeing voluntarily to have it disclosed,
and thus then be relevant to whether you are getting the
contract.
So I think that is an important part of this bill, that it
is something that those who want the Federal business, want to
have taxpayers fund their companies, they are agreeing to this
procedure.
I hope we are able to move forward in a positive way and
get to that front end, not just the collection, because I think
that is an important part, but that will be less important if
we stop, up front, stop and address the problem in the first
instance.
Thank you, Mr. Chairman.
Mr. Towns. Thank you very much, Mr. Platts.
Let me ask a couple more questions here.
Mr. Denett, help me. How could the current suspension and
debarment process guarantee uniform treatment of companies with
similar tax situations? I mean, how can you guarantee me that
they are going to be treated the same under the present
structure?
Mr. Denett. Well, in the sense that anybody who is
repeatedly not paying their taxes and on the list, I can't
speak for every debarment official, but if I am the person
looking at that, then I would suspend and debar them. But once
that is done, that applies throughout the whole Federal
Government, so nobody would be allowed to make awards to them.
If you are saying, like, with every individual case that is
being looked at would they reach the same conclusion in exactly
the same way? I guess I don't have an absolute way to say that
would happen, but I think just the fact that----
Mr. Towns. This legislation would do that. It would make
certain that people are treated fairly that fall into the
category. That is my concern. I mean, I want everybody to be
treated the same.
Mr. Denett. Well, again, I am just concerned that it
becomes a de facto debarment without giving them the normal
debarment due process. I guess that is the procurement
perspective that I am coming from. I don't think people should
be debarred without having, under the Federal acquisition
regulation, the process to have their opportunity to fully
explain why they believe they should be allowed to continue to
do Government service. Not the extreme cases that I am hearing
Mr. Kutz describe, of super-sensitive ones or ones where it
doesn't make sense, but there could be senses where it made
sense to allow the person to continue to have Government
business and pay off their debt.
Mr. Towns. You really think, when you talk about the
Federal acquisition regulations, that we require prospective
contractors to certify whether or not they are delinquent in
their taxes or have a history of tax fraud, you think we can
rely on that?
Mr. Denett. We currently rely on certification for small
business side standards, lots of other things. Again, there are
criminal penalties if they sign and say that they don't have
any tax delinquencies and they do. Then the Justice Department
can pursue them.
We are working with the Justice Department now on a fraud
task force where we are taking lots of steps to try to increase
finding out people that are doing wrongdoing on all fronts. I
think tax evasion would be included in that.
Mr. Towns. What if they find out that the IRS is not going
to verify. Couldn't they just sort of put down anything? These
are people that have already defrauded the Government.
Mr. Denett. That is of concern to me, and I would be
willing to work with the committee, with Treasury Department
and GAO to see what we can do to create a level playing field,
because I don't want people winning contracts because of an
unfair advantage of they are not paying taxes. That is not
right. I would be glad to work with everybody to see what
solutions we can come up with, considering your legislation,
the regulation that we have proposed, which I think will help,
and just see what else we can come up with.
Mr. Towns. Let me just sort of throw this out for you, Mr.
George and Mr. Kutz. What do you think really should happen?
Mr. George. Well, I would point out, and I note this in my
submitted testimony, that there is an analogous program called
the electronic return originator which the IRS uses to qualify
people who want to submit electronic tax returns on behalf of
taxpayers. There is an elaborate process, but elaborate meaning
that it is thorough, but it is not so complicated that people
can't engage in it, where the IRS requires people to not only
submit certifications about taxes being paid, but even
fingerprint cards. So there are examples of Government programs
that would help, I think, allay some of the concerns that Mr.
Denett has noted.
Mr. Towns. Mr. Kutz.
Mr. Kutz. I think you have to have a fair system. Whatever
is done has to be done systematically across the board. I agree
with the concerns that different contracting officers would
handle these cases differently.
You have to set the criteria in law and then apply it to
everyone, so that if it is 180 days, as your bill says, if that
is what is determined, or whatever it might be, that applies to
everyone, and then you can prohibit those people from getting
future Government contracts and you could use some of the
existing tools out there such as what Mr. George mentioned
earlier, the Treasury offset program and the central contract
registry, which everyone that can get a Federal contract is
supposed to be registered in this central contract registry.
That is one place where you could do periodic systematic
validations to determine if people have tax issues.
Mr. Towns. Right.
I yield to the ranking member.
Mr. Bilbray. Yes, Mr. Chairman.
I think it should be agreed on that list should be reviewed
so that, in a timely manner, if there is a problem contractors
can be notified in time to be able to address the issue, rather
than just rely on when they apply for a contract, because,
let's face it, by that time any action taken is going to be
onerous, at least from the contractor's point of view, because
of the time lag to address those issues.
So GAO came up with 122 referrals to the IRS. Do you have
any information for us of what is the outcome of those
referrals?
Mr. Kutz. Unfortunately, there have been no indictments or
prosecutions that we are aware of. I think that gets back to
one of the issues. When we look at payroll taxes, which is
effectively stealing money, it is like stealing money from a
401(k) plan, and there is a law that calls it a felony. Those
referrals, there is a lot of collection activity, kind of a lot
of asking will you pay, etc. Very little aggressive action from
a seizure standpoint, a levy standpoint, and we see little or
no activity from a criminal standpoint. It is all civil.
Mr. Bilbray. And let me just tell you I think that is an
issue that Congress, as a whole, should be talking about,
because this is a chronic problem across the board for the IRS.
You have contractors out there that should be accruing these
funds in the name of an employee and just sort of--it is easier
to put it off, put it off, put it off, and once you start
getting in the habit of doing that it is easy to ignore it
until things get absolutely chronic.
Mr. Chairman, I think that we have at least been able to
sensitize the system to the fact that this is an issue that
needs to be addressed, and I appreciate the panelists being
before us today.
I yield back.
Mr. Towns. Thank you very much.
Mr. Ellsworth.
Mr. Ellsworth. Thank you, Mr. Chairman.
Mr. Denett, debarrings--I don't know what the proper name
is--debarments do go on, right? You do that?
Mr. Denett. Yes.
Mr. Ellsworth. And so we have done those?
Mr. Denett. Yes. I actually did one personally when I was
at a department level, actually when I was at the Treasury
Department.
Mr. Ellsworth. So they can do them down to that level, at
the department level?
Mr. Denett. That is where it is done.
Mr. Ellsworth. OK.
Mr. Denett. Each department has their own debarring
official and each one of them makes calls, and once they do it
applies to the whole Government.
Mr. Ellsworth. How long is the due process? A red flag
comes up on a company that is bidding on a Federal contract. We
put it into due process mode. How long does it take before you
determine yes, we can award this, or no, they can't have it,
that due process security that you are talking about that you
would hate to see them go without due process. How long is
that, the hearing and the process when a flag goes up?
Mr. Denett. My recollection, from the one that I personally
did, which was years ago, it took about 60 days.
Mr. Ellsworth. And during that time, if it was a company
that was purposefully defrauding us and not wanting to pay
their taxes, would they still be awarded the Federal contract
they were going after during that due process period? Is that
possible? Or are they put on hold saying we have to investigate
this?
Mr. Denett. It depends if we are looking at this before an
award or after an award. When we are doing it before an award,
the contracting officer is trying to decide if a company that
they are thinking of making the award to is responsible, and so
there are several things they look at to decide if they are
responsible. One of the things that we would like them to be
considering is the position on taxes. That is before award.
Mr. Ellsworth. Right.
Mr. Denett. And if you decide they are not responsible, you
would not make award to them.
Then the next status is when somebody already has the award
and you find out that they are tax delinquent or other serious,
egregious things. You can examine it to see if they can be
debarred and prohibited from future Government procurements.
Mr. Ellsworth. OK. Thank you.
Mr. Chairman, I have nothing further. Thank you very much.
Mr. Towns. Thank you very much, Mr. Ellsworth.
I yield to Congressman Duncan from Tennessee.
Mr. Duncan. Thank you, Mr. Chairman. Since I just got here,
I will be very brief and just ask a couple of questions.
Mr. Kutz, you say in your statement that there ought to be
a law that requires contractors to pay their taxes before
participating in the Federal procurement system, but that we
also should make sure that there is appropriate due process
safeguards in the legislation. Do you think that you are
satisfied with the due process safeguards in H.R. 1870?
Mr. Kutz. Yes. I think that the due process relates to
whether someone actually owes the tax and the flexibility
allows, for example, the Secretary of Defense to waive the
debarment for a contractor that provides a certain good or
services that is necessary for national security, and there may
be other flexibilities, but I believe the intent of what I have
seen would get those issues. Disasters is another one I recall
in your bill. Those are the kind of flexibilities we would
think are important, so that you aren't just systematically
prohibiting everyone, but you allow some flexibility.
Mr. Duncan. Now, as I understand it, this bill would treat
the eligibility to treat for a Federal contract like the
eligibility to receive a Federal loan or a loan insurance
guarantee; is that correct?
Mr. Kutz. Yes. This would amend the Debt Collection
Improvement Act, which already requires that for loans.
Mr. Duncan. So it would put in tougher requirements for
Federal contractors?
Mr. Kutz. Yes.
Mr. Duncan. And doesn't it seem to you that it would be
appropriate to do that, since most Federal contracts are bigger
than the great majority of Federal loans or loan guarantees?
Mr. Kutz. Could you repeat the question? I didn't hear the
last part.
Mr. Duncan. Doesn't it make sense to you, or don't you
think it is appropriate to treat Federal contractors a little
tougher in that respect, because most of these Federal
contracts are bigger certainly than most of the Federal student
loans and things of that nature.
Mr. Kutz. Yes. I think some of the members here have
mentioned that it is a privileged----
Mr. Duncan. Right.
Mr. Kutz [continuing]. To do business with the Government.
Mr. Duncan. That is what I am saying.
Mr. Kutz. So you should be held to a higher standard than
someone else.
Mr. Duncan. Sure.
Mr. Kutz. I agree with that.
Mr. Duncan. Well, they have done a better job in expressing
that than I did, but that is what I was getting at.
Mr. Kutz. Yes.
Mr. Duncan. All right. Thank you very much.
Thank you, Mr. Chairman.
Mr. Towns. I yield to Congressman Platts.
Mr. Platts. Thank you, Mr. Chairman.
Just one final question. The FAR proposal that stands out
there, I guess your perspectives on what this proposed
legislation will do that goes farther than that. How do you
view the two in comparison?
Mr. Denett. Well, I think if the proposed legislation would
prohibit making awards, so what I am saying is that would be a
de facto debarment. The regulation that we have out for comment
now in the Federal Register would give people an opportunity to
make it clear for contracting officers that anybody who is tax
delinquent, that is a cause for debarment, for
irresponsibility, etc. It is not now currently listed.
Mr. Platts. Let me interrupt. If we take that approach,
that makes it pretty subjective approach to this issue. One
officer could deem this as a grounds for irresponsibility and
not awarding the contract; somebody else may look at it and
say, well, it is not that much owed back or they will pay it
eventually if you give them this contract. It would make it
more subjective, wouldn't it, whereas this is more objective.
If you owe, you are delinquent, you are prohibited. I mean,
this would be more consistent. Is that a fair statement?
Mr. Denett. I think that is a fair statement, but each case
is different and sometimes there are circumstances where it
would be in the Government's best interest to allow a
contractor to receive an award so that they can earn the money
to pay their tax delinquencies.
Mr. Platts. Well, the bill would not affect, if they were
on a repayment schedule, they would not be prohibited. To be
trying to pay $10 a week, $100 a month, whatever, how small or
large, they could be doing that now and still get the contract
under this bill. They would not be prohibited if they have a
repayment schedule in place.
Mr. Duncan. Will the gentleman yield just for a moment?
Mr. Platts. Yes. I yield to the gentleman.
Mr. Duncan. That raised the question in my mind, Mr.
Denett. Has that ever been put in as a condition of an award?
When you say there are cases in which contractors should be
given a contract so that they can pay their delinquent taxes,
has that ever been put in the contract award, a condition like
that?
Mr. Denett. Not to my knowledge.
Mr. Duncan. We are going to give you this second contract,
but we know you are delinquent, so you have to use a certain
percentage of this money?
Mr. Denett. I am not aware of that being put in any
contract.
Mr. Duncan. I yield back.
Mr. Platts. And I assume there is no current authority to
say we are going to give you this contract and this 10 percent
we are going to pay right to the Treasury to make sure you are
paying back?
Mr. Denett. I mean, we have the system now where it has
just been implemented where the payment officials in IRS check
their data bases, and if there is any delinquency, rather than
pay them the money, they can retain 100 percent of any going
through a DOD contractor or 15 percent through any civilian.
Mr. Platts. So they can allow that now?
Mr. Denett. It, in fact, is happening.
Mr. Platts. I was going to ask if that is commonly done.
Mr. Denett. It is becoming more common.
Mr. Platts. That is good.
Mr. Denett. I mean, it has just been instituted in the last
year or so.
Mr. Platts. Coming back to my initial question, where that
discretion is given, I can understand where there may be cases
where it seems like in the Federal Government's best interest,
that if you give them this contract then they will have a
source of income and may be more likely to get those taxes.
That, unfortunately, does not address the issue I raised with
the GAO's statement to the law-abiding company that didn't
violate the law in the first place that didn't get the contract
because they were under-bid. That is an issue I think that we
have to remember here, that this is also about fairness to
anybody competing for those contracts, because they are going
to be put at a disadvantage. Even if it is in the Federal
Government's interest, it is still not going to be a fair
process because of the individual not being straight up in the
bid.
Mr. Denett. I think we need to take a real close look at
that. I am looking forward to working with the committee and
learning more from Treasury and IRS and the GAO so that my
office gets even more up to speed on this issue, because I am
disturbed about the uneven playing field. However, every case
is different, and I am very reluctant for somebody to, in
effect, be debarred without having a chance to explain to the
contracting officer what their particular circumstance is.
Mr. Platts. I think the importance of this hearing and
commend again the chairman, that is exactly what this hearing
is about, to get the dialog developed as we go forward in
trying to move a good piece of legislation.
I yield back.
Mr. Kutz. May I make one comment on that?
Mr. Platts. If the chairman allows.
Mr. Towns. Yes.
Mr. Kutz. With respect to those 120 cases we investigated,
it is kind of interesting, because I have studied those and we
have been doing them for several years, and when you look at
the IRS enforcement of the tax code you saw the reason they
were able to buildup 10 or 20 years of unpaid taxes, it was
because that is just what happened. They kept saying IRS things
are going to get better. Let us have more time. Give us more
time. It is just worse.
Mr. Platts. That good faith wasn't rewarded.
Mr. Kutz. I can't speak to the 122, but we have seen that.
When I used to audit the IRS as their financial auditor, also,
we saw it then, too, same thing. These are the bad 1, 2, 3
percent of society kind of thing, but, you give them time, they
are going to continue to do the same thing over and over again.
You keep asking the same, you don't get different results.
Mr. Platts. Well, thanks for the testimony, and each of you
in your respective positions. Thanks for your service to your
Nation and your fellow citizens.
Thanks, Mr. Chairman.
Mr. Towns. Thank you. Thank you very much.
Let me thank all of you for your testimony. Of course, this
panel has been dismissed.
We will have a 30 minute recess. We have votes on and then
we will return.
Thank you very much.
[Recess.]
Mr. Towns. The committee will come to order.
[Witnesses sworn.]
Mr. Towns. Let the record reflect that they responded in
the affirmative.
Why don't we just move forward with you, Mayor Cornett, and
come right down the line.
STATEMENTS OF MICK CORNETT, MAYOR, OKLAHOMA CITY, OK,
REPRESENTING THE U.S. CONFERENCE OF MAYORS; BARBARA FORD-
COATES, TAX COLLECTOR, SARASOTA COUNTY, FL, REPRESENTING THE
NATIONAL ASSOCIATION OF COUNTIES AND THE NATIONAL ASSOCIATION
OF COUNTY TREASURERS AND FINANCE OFFICERS; AND PATRICIA WETH,
DEPUTY TREASURER, ON BEHALF OF THE HONORABLE FRANCIS O'LEARY,
TREASURER, ARLINGTON COUNTY, VA
STATEMENT OF MAYOR MICK CORNETT
Mr. Cornett. Thank you, Mr. Chairman. I appreciate the
opportunity to come before this subcommittee on behalf of the
Nation's mayors. My name is Mick Cornett. I am the mayor of
Oklahoma City. I am also the chairman of the Mayors Urban
Economic Policy Committee.
I am here today to show our support for proposed
legislation that would create a 2-year pilot program to help
local governments collect legally enforceable past due taxes by
expanding the Federal tax offset program to include local tax
debt. If enacted, this legislation would promote the kind of
intergovernmental partnership that we have always believed
should exist between the different levels of government. When
we work together to achieve a common goal, particularly a goal
as important as collecting past due taxes, all levels of
government benefit, as well as the American people.
First of all, we want to commend you, Mr. Chairman, for
your strong support you have shown for local governments on a
wide range of issues over the years. Thank you also for your
leadership on this proposed legislation, particularly for
focusing attention on the need to expand Federal assistance to
help local governments collect past due taxes.
We also want to commend the co-sponsors of this
legislation: Representative Michael Turner, the former mayor of
Dayton; Representative James Moran, the former mayor of
Alexandria; Representative Tom Davis, the former county
executive of Fairfax County; and Representative Bilbray, the
former mayor of San Diego. Thank you for your support. These
Members clearly understand the importance of intergovernmental
partnership in addressing issues that affect all levels of
government.
Last year during our annual meeting, Mayor Laura Miller of
Dallas reminded us that local governments often find it
difficult to collect past due taxes. Sometimes we spend an
enormous amount of time and energy trying to go after
delinquent taxpayers, and we are not always successful in
collecting past due taxes, particularly when those taxpayers
may have left the area or don't have the resources to pay those
taxes. It not only places a financial strain on local
governments, but it unfairly burdens members of the community
who do choose to pay their taxes promptly.
Before I get too far into my testimony, I would like to
share some background information on the delinquency problem in
my city. Unlike some cities, Oklahoma City does not collect an
income tax of any kind. We use property tax to fund our capital
improvements through bond issues, and that property tax is
actually collected by the county and distributed to us.
We are mainly funded by the sales tax, especially on the
operations side. That is collected by the State and, again,
distributed to us.
To prepare for this trip, I asked my staff to review our
sales tax data to determine the delinquent rate. They reviewed
our sales tax data for the last 6 months and came up with some
estimates. From our review, we estimate that we have a
delinquent sales tax rate somewhere between 5 and 7 percent,
and so we believe it is safe to assume that our delinquent
sales tax total is about $10 million a year.
Now, according to information provided by our county
treasurer's office, in the 1st year property taxes are due that
delinquent tax amount is about 5 percent of the total amount
levied for the year. If you go back to fiscal year 2005-2006,
that amount totaled about $2 million. If you look over a longer
period of time, an 8-year average ending in 2005-2006, the
delinquent property tax rate settles out at about 1.4 percent,
or about $4 million out of the total of $284 million levied
during that period.
Let me put that in perspective to show you some examples of
what we would be able to do in our city if we were able to
recapture those delinquent taxes.
On average, we can resurface a lane mile of road for about
$200,000. If you use that $2 million estimate, that means that
is about 10 lane miles of road that we could be resurfacing,
and if you use the $4 million estimate, you could double that
to 20 lane miles of streets.
Another good example of how those dollars could be used has
to do with homeland security. In a post-9/11 world I know you
all agree we need to increase our security. Indeed, the Federal
Government is working closely with us to help secure our
homeland. Many of our cities could use the funds currently due
from delinquent taxes to hire new first responders. In Oklahoma
City, the cost for me to hire a new fire fighter or a new
police officer is about $60,000 a year. If you use the $2
million estimate, that is about 33 new fire fighters or police
officers that we could use. And if you use the $4 million, we
could hire approximately 67 new fire fighters or police
officers.
Now, these are just a few examples of the critical public
services that we could provide if we recaptured all or a
significant portion of our past due taxes. And it is not true
just for Oklahoma City, but cities and local governments all
across the country.
We are excited that you are considering creating
legislation to assist us in this effort.
During that annual meeting last June, Mayor Miller informed
us about the Federal tax offset program and the original
bipartisan bill, H.R. 3498, introduced by Representative
Turner, Moran, and Davis. This bill would expand the program to
include past due taxes owed to local governments. Under current
law, the U.S. Department of Treasury is authorized to reduce a
taxpayers' Federal tax overpayment refund by the amount that
individual owes the State government in past due income taxes
and child support obligations and send those funds to the
appropriate State government.
We understand that 36 States and the District of Columbia
currently participate in the program, and that pending
legislation will expand the program to authorize the Department
of Treasury to reduce the Federal income tax refunds due a
taxpayer by the amount of past due legally enforceable tax
obligations that the taxpayer owes to a local government.
Mayors attending our annual meeting last year unanimously
supported adopting the resolution of supporting H.R. 3498. We
are pleased that this proposal has been re-introduced to the
110th Congress as 1865. Mr. Chairman, we stand ready to work
with you in support of that bill.
In addition to participating in the Federal tax offset
program, a number of States have their own State offset
program. So far, 14 States are permitting local governments to
submit their delinquent tax accounts to the State for
collection against any State tax refund or any lottery winnings
owed to taxpayers. The way this works is, prior to issuing a
taxpayer refund the State checks to see if there are any claims
for past due debts submitted by a local government, and if so
the State will delay sending the refund of the lottery winnings
or the taxes pending notice to the taxpayer. After appropriate
notice is given, the State will reduce the delinquent
taxpayer's refund or lottery winnings by the amount owed and
send those funds to the local government. In many States, this
has proven to be a low-cost, highly effective system.
We do have one recommendation that we would like to see you
all consider, and we would ask for your consideration now or at
a later date.
The proposed legislation would establish a pilot program
for no less than three and no more than five States. While we
understand your concern about proceeding with caution, we would
recommend expanding the number of pilot programs to no less
than four and no more than eight. We feel like this would allow
for the pilot program to be established in at least two States
in every region of the country--north, south, east, and west.
Not only would that give more local governments a chance to
participate; it would give Congress a better chance to see how
this might work in different States and different regions of
the country.
I want to thank you all for the opportunity to appear at
this hearing. We appreciate your work and we appreciate your
looking after us local governments, and remind everyone here
that local governments are the ones closest to the people and
we impact their lives every day.
Thank you.
[The prepared statement of Mayor Cornett follows:]
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Mr. Towns. Thank you very much, Mr. Mayor, for your
testimony.
Mr. Cornett. Thank you.
Mr. Towns. Ms. Barbara Ford-Coates is the elected tax
collector of Sarasota County, FL. She is representing the
National Association of Counties and National Association of
County Treasurers and Finance Officers.
We are delighted to have you.
STATEMENT OF BARBARA FORD-COATES
Ms. Ford-Coates. Thank you, Mr. Chairman.
Chairman Towns, Ranking Member Bilbray I want to thank you
for the opportunity to testify today. As the Chair has stated,
my name is Barbara Ford-Coates, and I serve as president of the
National Association of County Treasurers and Finance Officers.
Our organization is affiliated with the National Association of
Counties, and we represent all elected and appointed county
treasurers, tax collectors, and finance officers in the United
States.
On May 1st I will complete 23 years as tax collector for
Sarasota County, FL, and I have been able to serve the public
all these years only because we provide exceptional customer
service to the public. If you can take someone's money and have
them still leave the office with a smile on their face, it has
to be exceptional service.
I also provide service to many governments, including the
State of Florida, Sarasota County, four cities, a public
hospital, the School Board, and numerous smaller taxing
districts. We do all of this in a cost-effective, efficient
manner.
I bring this up to emphasize that good government is a
bipartisan issue. I happen to be the only elected Democrat in a
county of over 360,000 people. My voters care about good
government.
I applaud the committee for your interest in H.R. 1865
because it is a prime example of local, State, and Federal
cooperation to provide cost-effective efficiencies. I thank the
Chair and ranking member, especially, for sponsoring this
bipartisan effort.
In particular, I want to point out that this bill is the
antithesis of an unfunded mandate. The Federal Government would
provide a service for local governments, and we would bear the
cost. It is simply a win/win for government and the people we
serve, or, as the ranking member said earlier, it is done the
right way and in the right manner.
I won't take up your time with the details, since I know
they are being adequately or perhaps more addressed by Mayor
Cornett and Deputy Treasurer Weth, who have a deeper knowledge
of those specifics than I do at this point.
But, simply put, the National Association of Counties and
County Treasurers and Finance Officers are in full support of
the legislation as proposed. However, I would like to mention
that there are several things which appear in my written
testimony which I hope we have the opportunity to discuss
further with your staff and the staff of Treasury. These would
increase flexibility and, we believe, make the program more
effective.
This legislation is a model for building a collaborative
intergovernmental partnership. The key features are that it is
voluntary, fee based, designed to avoid creating an undue
burden, and offers both flexibility in implementation and a
trigger to terminate the program if it does not achieve its
objectives. It is an example of the golden rule: do unto others
as you would have them do unto you.
However, I have heard that there also is a golden rule of
federalism: those who coin the gold make the rules. With that
in mind, I do want to take this opportunity to mention two
areas of concern which are the result of recently enacted and
proposed legislation. These examples of that other golden rule
are troubling because they are coercive rather than cooperative
byproducts of the Federal Government, understandably striving
to reduce its own tax gap. These would require local officials
to collect Federal taxes, implement new reporting software or
procedures, or provide Federal tax advice without consultation
or payment of the costs involved.
First, section 511 of the Tax Increase Prevention Act will
soon require many counties to withhold 3 percent Federal taxes
on nearly every payment for a service or product, from plumbing
services to paper clips. This amounts to a Federal sales tax on
county purchasing, will be very expensive for counties to
implement, and will likely increase the costs of procurement
and discourage contractors from bidding on county contracts.
I urge members of this subcommittee to join with
Representative Kendrick Meek from my State of Florida to co-
sponsor H.R. 1023 to repeal this unfunded mandate. And I would
like to insert a copy of that legislation into the official
hearing record, along with copies of our testimony and letters
of support.
The proposal on 3 percent withholding was a result of
inserting a Joint Committee on Taxation staff recommendation in
the conference report after the bill had been passed by the
House and Senate.
Another troubling example could stem from the recent
proposal from the same source to require collectors of local
taxes to determine whether our taxpayers can deduct items
appearing on property tax bills. Then we would report that
information to both the IRS and the taxpayer. The
administrative burden would be enormous, and county officials
charged with producing tax bills are, in the vast majority of
cases, not qualified to make a determination of whether special
assessments are deductible or non-deductible under the IRS
code, nor do we have a method to collect the identity of
property taxpayers or compel them to report Social Security
numbers or taxpayer identification numbers as part of their
property tax accounts.
I would like to insert a copy into the official hearing
record, along with our letters of opposition to that
possibility.
I thank you sincerely for your interest in good government.
I know each of you has a local tax collector, treasurer, or
finance officer to whom you are paying checks on a regular
basis, and I urge you to continue to work with us in developing
strategies to improve compliance with local, State, and Federal
tax laws.
H.R. 1865 is a step down the path of intergovernmental
cooperation and should serve as a model for any future efforts
to close the Federal tax gap with the assistance of State and
local government.
I thank you for the opportunity to provide testimony today
and look forward to answering any questions.
[The prepared statement of Ms. Ford-Coates follow:]
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Mr. Towns. Thank you very much for your testimony.
We also have today Patricia Weth, the deputy treasurer of
Arlington County, VA.
STATEMENT OF PATRICIA WETH
Ms. Weth. Good afternoon, Mr. Chairman, Representative
Bilbray, and Representative Duncan. I am Patricia Weth, deputy
treasurer and legal counsel to the Arlington County Treasurer,
Frank O'Leary.
Thank you for holding this important hearing today. I am
here to ask your support, favorable consideration of H.R. 1865.
I appreciate the subcommittee holding this hearing on the
proposed pilot program legislation, which will greatly benefit
your constituents, and I look forward to answering any of your
questions that you may have on this legislation.
I also ask that the written testimony be entered into the
record.
Like the Federal Government, State and local governments
have tax gaps. Not everybody is willing to pay their taxes. The
more each level of government can fairly collect the taxes that
are owed, the less pressure there will be to increase taxes to
the honest taxpayers who are paying their taxes timely.
The Federal offset program was created in the 1980's after
legislation was passed to allow States to submit child support
arrearages to the offset program to offset Federal tax refunds
of deadbeat dads. Later the program was expanded to allow
Federal Government agency debt. And in 2000, legislation was
passed to allow the States to submit delinquent income tax debt
into the program.
When my boss, Frank O'Leary, saw that States were allowed
to submit State income tax debt, he thought that the logical
and natural progression would be to allow local government tax
debt into the program.
We have worked with bipartisan Members, numerous government
associations, and the Treasury to refine this legislation and
to ensure that there would be no additional cost to the Federal
and State government. Without this legislation, local
governments are forced to assess greater taxes on the honest
taxpayers to make up for the loss in revenue for those who are
not paying the taxes.
Under this legislation, the only cost is to the delinquent
taxpayer, who is now forced to finally pay his outstanding tax
obligation. In the proposed legislation for the pilot program,
it does authorize Treasury and the States to charge to the
local governments a fee to defray any administrative costs that
they may have in processing these claims. Currently under the
regulations, Treasury does collect a $25 fee from the State
taxing authority for every claim where there is a refund match.
Last year the Commonwealth of Virginia received over $16
million for delinquent income tax debt. We estimate that
Virginia local governments would recover between $65 and $70
million during its first year of participation in the program.
Virginia treasurers have a great deal of collection tools given
to us by the Virginia General Assembly, but I feel that this
pilot program will benefit all local governments, but
especially those local governments that do not have a vast
amount of collection tools at their disposal.
This is a bipartisan good government bill. It makes an
important step toward the coordination between three different
levels of government to address the tax gap. It protects the
honest taxpayer from any tax increase. The only cost is to the
delinquent taxpayer, who now is finally paying his tax
obligation.
Thank you for your consideration. I am happy to answer any
questions regarding the legislation.
[The prepared statement of Ms. Weth follows:]
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Mr. Towns. Thank you very much, too, for your testimony.
Ms. Weth. Thank you.
Mr. Towns. Let me begin with you, Mr. Mayor.
Why do you suggest a pilot program rather than just doing
it?
Mr. Cornett. Well, I think we would just as soon just do
it. I think that the pilot program, to a certain extent, isn't
our idea. We are just willing to proceed with it and make it as
large as possible.
Mr. Towns. And you think that would sort of bring people on
board that might not be on board?
Mr. Cornett. Well, I don't know necessarily if it would do
that, but I think the larger you could make it the better it
would be for local government, the more of these delinquent
taxes that we would be able to recoup. I know there is some
reluctance to try to do this all across the country all at
once, just because there might be some people on the other end
of this that are leery that it will work as smoothly as we
project, but we would like to see it.
You have to understand that local governments work so
differently throughout the country that I think it would be a
good idea to try every different taxing situation you could
find. The relationship between municipal government and county
government and State government work distinctly different in
almost all 50 States.
Mr. Towns. Right.
Mr. Cornett. It is going to work better in some places than
it will in others.
Mr. Towns. Right. I guess what we need to do is probably
get a good definition of local taxes. I mean, what do you
consider local taxes? I mean, I think we need to get a good
definition, because when you look at parking tickets, library
fines, sewer fees, and sometimes even trash collection----
Mr. Cornett. I would consider local sales taxes and local
property taxes as local taxes.
Mr. Towns. Ms. Coates.
Ms. Weth. Mr. Chairman, that was a concern of a lot of
folks, that we would throw in library fines and parking tickets
and different fees of that nature, but this is limited
specifically to local government tax debt, so it would only be
for a tax that a local government charges, so parking tickets
and library fines would not be allowed to be submitted to
Treasury.
Mr. Towns. Right. Thank you, that is good to know.
Ms. Weth. Mr. Chairman, also, as the mayor stated,
sometimes things are called different things in different
communities, so I believe the bill allows it up to Treasury to
work on what would be considered a local tax. So there is a lot
of flexibility in here, and I personally think that one of the
best things about the pilot program is that it gives us an
opportunity to work with Treasury and work out those details so
that it makes common sense.
Mr. Towns. Right. And I must admit that I sort of like the
pilot program, too, sort of like test it before we really
implement it fully.
Ms. Ford-Coates. Right. And, of course, with States like
Florida we have no income tax, and we are not sure exactly how
those of us who have no income tax will fit into this in the
future, but it is an area that we want to support or
neighboring States and our colleagues in local government so
that they can start that, and maybe there is a place for us
down the road after all the details are worked out.
Mr. Towns. Right. In your testimony you used the word
flexibility twice. What do you really mean by flexibility? You
said greater flexibility.
Ms. Ford-Coates. We would like to see the Department of
Treasury have the opportunity to decide on the number of pilot
programs. If there are a certain number of States, as in the
current bill, if there is a State that is suddenly ready
sooner, we would like Treasury to have that opportunity to make
some of those decisions as the process is worked through.
Mr. Towns. Yes. Let me ask all three of you this question:
what do you see that is not in there that should be in there,
if we are looking for an ideal situation here?
Ms. Weth. Mr. Chairman, I don't see anything missing in the
legislation. I do agree it would be a wonderful thing to open
it up to all the States and let all local governments
participate, but I think we do need to make it a pilot program
to allow the Treasury some time to evaluate the program and
work out the kinks before it is allowed for each State and each
local government. But I am afraid nothing comes to mind that I
see specifically missing in the legislation as it is written
now.
Mr. Towns. All right.
Ms. Ford-Coates. Mr. Chairman, we would like, again, an
area that we believe that the Treasury could work out is the
question on how certified mail is specified within the bill,
because there are certain products that the Postal Service
offers that change on a regular basis. Technology changes. We
would prefer something along the lines of adequate notice,
whatever. We want to make sure that the taxpayer knows what is
going on. There is no question about that. But I think that is
one of those things that Treasury could work out with your
staff as the bill proceeds.
Mr. Cornett. I have no suggestions.
Mr. Towns. That means it is a good bill.
Mr. Cornett. Nice work.
Ms. Ford-Coates. We think so.
Mr. Towns. Thank you very much.
I yield to the ranking member.
Mr. Bilbray. Thank you very much.
I guess after being 18 years in local government and having
worked with the Federal Government, I think even the mayor on
second thought will look at this. Twenty-four months is a flash
in the pan for the Federal Government. I think, Mr. Chairman,
one of the biggest problems that those of us in local
government have with the Federal Government isn't that they try
new things or that they make mistakes, but they usually don't
want to go back and correct the mistakes once they have made
it.
I think that one great advantage with a pilot program is
that it does give political cover. I remember when I was 27
years old when I was elected mayor, and I developed a policy of
pilot programs because you could say let's try this, and then
if it doesn't work out, instead of taking the political heat
that it didn't work out you say, see, I was right to have it as
a pilot program.
I think that we are going to find things that need to work
out, but I have to sort of agree with the mayor and, I know
these numbers, but the four to eight is a workable number. I
would only say, Mr. Chairman, we at least consider that aspect
of it as the possible expansion, and as being one of the co-
sponsors on this I think that we ought to at least discuss that
testimony and look into it.
All I have to say is, to the gentlelady from Florida, my
uncle was a tax assessor in Las Vegas for 30 years, a dyed-in-
the-wool Democrat, but he survived in that environment for 30
years. So how tough you think it is, you can imagine being out
there in the desert with all those slot machines.
Ms. Ford-Coates. I sympathize.
Mr. Bilbray. My question would be: how successful do you
think the process is right now that we are building on here?
Mr. Cornett. I guess the question I would have is what
percentage of tax refunds now are coming in. Do most people get
a refund? Do most people not get a refund? Even if this
legislation were 100 percent effective it is still not going to
solve 100 percent of our problem. But we are talking about
millions of dollars, and at local government's level a lot can
be done with those millions of dollars.
Mr. Bilbray. I am out of order because I haven't done a tax
return in probably 20 years, but my family has owned a business
from the year I was born. I guess my mother decided to get out
of having children and go into something more productive after
she looked at me. But the one thing that is obvious for those
of us that were tax consultants is the overwhelming majority of
the rank and file that file returns are getting money back.
That is the biggest incentive for people to file returns. There
is a whole other problem with those that have outstanding debts
with the Federal Government, but for those that are filing,
there really is an incentive out there.
I think on the negative side you might be able to say that
some may not file now, knowing their withholdings won't be
returned to them, but I think that is a very small number in
reality. I think by the time they get hit with this it will be
too late for them to know about not filing. So I think we need
to build on this and hopefully we will be able to work out all
the details.
The challenges that we have with who we choose is going to
be a tough one, but I hope that we all work together on this.
I ask, because we are all sort of local government people
here, that the separation of powers is so often talked about
between the three branches of Federal Government, and I wish
our government teachers would teach more often that the real
separation of power is between the local, special district,
city, county, and State. That is where the real power is, than
those of us in the Federal Government.
Mr. Chairman, I support this program and I support it for a
big reason. I think those who always talk about that the
Federal Government isn't sending enough resources down to what
we call the first responders should look at this as a way,
instead of us taking Federal money and controlling it and
conditioning it and sending it down and making the local
government say thank you, sir, for letting me have this little
bit, ought to be empowering in working with the local
government to get their own money from their own constituents
so they can do it with no conditions and then the first
providers won't be needing to come to us hat in hand, or a lot
less hat in hand, because they will have those resources that
are being denied them now, not by the Federal Government but by
those deadbeat taxpayers out there, both women and men.
I appreciate the chance for you to be here to day, and I
yield back, Mr. Chairman.
Mr. Towns. Thank you very much.
I want to thank all of you for coming and testifying. I was
wondering if there was any kind of collection tools that need
to go into this. I mean, do you really feel that part is
covered? Do we need any collection new rules that need to be
changed from the Federal level in order to make it possible for
you to be able to collect?
Ms. Weth. Well, Mr. Chairman, I can speak about Virginia.
In Virginia the local government treasurers look to the Code of
Virginia for our power for our collection tools, and in
Virginia we have an amazing amount of collection tools. We are
able to lien bank accounts. We are able to seize vehicles. We
are able to go into businesses and seize the property and the
business. We do employment liens. So we have an amazing amount
of collection tools, but I don't believe many of the counties
and cities in the United States do not have the same powers
that the treasurers in Virginia have.
Mr. Bilbray. Would the gentleman yield a second?
Mr. Towns. I would be delighted to yield.
Mr. Bilbray. You hit on a point that I think all of us need
to talk about. You are talking about, like, the bank accounts.
I don't know about your neighborhood, but there was a big issue
about what constitutes a proper documentation to open bank
accounts, and there was this issue of foreign governments
giving documents that aren't secure, and there is such
potential for people to be opening bank accounts under false
identities and hiding their resources. This is specifically why
we have a Federal law that says you are supposed to be proving
who you are when you open a bank account.
I think, Mr. Chairman, we need to be very much on top of
that in talking to the Finances Committee because just
something like this, that somebody starts opening bank accounts
under a different Social Security number or under a taxpayers
ID number rather than one that we can track, they will use
these for hiding.
I want to say it because we don't think it bothers us until
we get to exactly like you said and you know the people that
are doing this will learn how to leverage the system and go
over. So please, when we talk about the proper identification,
things like implementation of a real ID is going to be
essential to programs like this.
I yield back, Mr. Chairman.
Mr. Towns. Yes, thank you.
Ms. Weth. I couldn't agree with you more, Representative
Bilbray. I think that is an excellent point. I wasn't even
aware that people were doing that these days, but in this area
of identity theft and all the craziness that is out there, I
think that is an excellent requirement.
Mr. Towns. The reason I was late coming back here is that I
am a sponsor of the spyware bill, and it was being marked up.
That is what I was doing.
Ms. Ford-Coates. I think everything has been said.
Mr. Towns. Mr. Mayor.
Mr. Cornett. No additional comments.
Mr. Towns. All right. Thank you so much, all of you, for
your testimony. We look forward to working very closely with
you in the days and months ahead.
I yield.
Mr. Bilbray. I apologize, but I would ask unanimous consent
to introduce into the record the opening statement by Ranking
Member Davis.
Mr. Towns. Without objection.
Mr. Bilbray. Thank you.
[The prepared statement of Hon. Tom Davis follows:]
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Mr. Towns. Thank you so much for your testimony.
Mr. Cornett. Thank you.
Ms. Ford-Coates. Thank you.
Ms. Weth. Thank you.
Mr. Towns. The committee is now adjourned.
[Whereupon, at 3:40 p.m., the subcommittee was adjourned.]
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