Mr. Paul Mamo
Internal Revenue Service
1111 Constitution Avenue
Room 2403
Washington, D.C. 20224

RE: FR Docket 02-19835
Electronic Tax Preparation and Filing; Intent to Enter Agreement

Dear Mr. Mamo:

The Progressive Policy Institute is pleased to submit comments in response to the above-referenced Federal Register notice.

The mission of the Progressive Policy Institute (PPI) is to define and promote a new progressive politics for America in the 21st Century. Through its research, policies and perspectives, the Institute is fashioning a new governing philosophy and an agenda for public innovation geared to the Information Age.

In reviewing the Treasury-IRS proposal for a national Public-Private Partnership to provide free online tax preparation and filing services to underserved segments of the U.S. taxpaying population, we were pleased to see the creativity of the solution design, its reliance on the natural competitive forces of the private enterprise system, and its marriage of the twin commitments of governmental social responsibility and voluntary corporate citizenship.

PPI has long advocated innovation in the way government approaches complex issues in the 21st Century. Electronic Government represents a critical path in the evolution of how the public sector functions in society. As we observed in our March 2000 study, "Digital Government: The Next Step in Reengineering the Federal Government":

"Done right, Digital Government promises to transform Industrial Age big government into Knowledge Age smart government. Old economy government was organized around agencies and bureaucracies that operated like stove pipes with little information flowing between them, and with operations developed to meet the requirements of agencies, not of citizens. New Economy governments will be organized around the functions and needs of citizens; with information and communication technologies a key enabler of this reinvented government."

In that report we outlined twelve principles for shaping and defining what would be required for electronic government to succeed. These principles were:

1. Think customer, not government agency.
2. Reinvent government, don't simply automate it.
3. Set an ambitious goal.
4. Invest now to save tomorrow.
5. Focus on digital transactions between citizens and government.
6. Make government applications interoperable with commercial ones.
7. Pass on a portion of savings from electronic transactions back to citizens.
8. Promote access to information on the Internet. Do not restrict it.
9. Respect the rights of Americans for information privacy.
10. Online access to government should not eclipse traditional means.
11. Federal efforts should complement, not duplicate private sector efforts.
12. Take action now and learn from mistakes.

Principle 11, "Federal efforts should complement, not duplicate private sector efforts," bears directly on the current IRS Electronic Tax Preparation and Filing proposal. It is predicated on a common sense rule that just that there is a difference between e-government and government conducting e-commerce. We strongly advocate that government should focus on using information technology to streamline government services, but at the same time recognize that there are a host of historically private sector functions where government efforts at e-commerce are inappropriate. Government duplication of the investments of the private sector in electronic goods and services, and competitively offering such consumer products in the e-commerce marketplace, is not a prudent or productive use of scarce public resources. In our discussion of Principle Eleven in the "Digital Government" report we noted:

"In OMB Circular A-76, nine successive American Presidents beginning with Dwight Eisenhower, have set forth a policy regarding the relationship of government to the performance of 'commercial activities'. That policy is well-summarized in one sentence: 'A commercial activity is not a governmental function.'"

"Whether the subject is USPS and electronic bill presentment and payment, or a state agency with electronic tax preparation services, or a federal department wanting to commercially sell its electronic payroll services, these forays cross the line into electronic commerce.

"For example, it is one thing for government to provide tax forms in electronic format (as they already do in paper format), it is quite another to provide tax preparation software that mimics the functions of tax preparers."

"Public funds, whether appropriated by Congress or generated through systems such as the Postal rate base, should not be used as venture capital to launch governmental agencies into competition with the private sector. There are too many necessary functions of government which are either going unfulfilled, or are being poorly performed in outmoded ways, to be able to justify in an era of limited budgets spending taxpayer dollars on activities which fundamentally change the role of government in our economy."

One of PPI's primary recommendations on reinventing the public sector in the 21st Century is for government to begin to utilize creative partnerships and cooperative alliances to advance the public interest, replacing bureaucracies with networks. PPI's New Economy Task Force, co-chaired by Senator Tom Daschle and Gateway Computer CEO Ted Waitt published its November 1999 report "New Rules of the Road." In that report, we proposed core concepts for economic transition for both the private and public sectors, which included the following proposal for government:

"Rather than act as the sole funder and manager of bureaucratic programs, New Economy governments need to co-invest and collaborate with other organizations -- networks of companies, universities, nonprofit organizations, churches and other civic groups -- to achieve a wide range of public policy goals. In short, many problems in the New Economy cannot be solved without government, but government alone can't solve problems"

"Most important, the collaborative network model requires government to relax rigid bureaucratic program controls and instead rely on incentives, information sharing, competition, outsourcing, and accountability to achieve policy goals."

It is therefore in the context of these threads of economic and public policy thinking, taken together, that we find the proposed Public-Private Partnership to advance the e-filing of income tax returns to be a promising innovation. As a Digital Government initiative, this solution is consistent with the principles needed to presage success: it is focused on the citizen and their needs, rather than on the government and its role; the proposed solution clearly has ambitious goals; it focuses on digital transactions, while facilitating the electronic filing of citizen returns to their government; the solution respects citizen privacy by keeping the process of preparing their tax returns independent and out of government; and it ensures that government and industry will play complementary, not competing, roles.

Importantly, consistent with New Economy principles, the solution relies on a voluntary network of companies rather than a bureaucracy to deliver services to the public. However, the proposed concept does not rely on voluntary industry initiatives alone, but appropriately partners those efforts with government leadership, putting structure and accountability to the program and assuring public access. Conversely, the initiative does not involve government duplication of, or competition with, private sector core competencies, but instead relies on and leverages private sector initiatives. This could provide the seeds of other inventive public policy initiatives.

The innovation represented in this concept should not be limited to the federal government, but, as the Agreement suggests, should extend to the States as well. As government budgets are under increasing fiscal pressure, a creative solution of this type is far preferable to governments spending hundreds of millions of public dollars attempting to duplicate private sector investment.

Finally, the focus of this proposed Partnership on underserved populations, including lower-income citizens, is particularly important. PPI published a joint study with the Brookings Institute in May 2002 regarding the plight of the working poor in low-income communities, and how they have been targeted by traditional storefront tax preparation businesses and check cashing services as corporate profit centers. That study, "The Price of Paying Taxes," reports on how Earned Income Tax Credit (EITC) applicants have essentially had to pay to receive their EITC benefits, which was never the intention of welfare-to-work reforms. The high costs of storefront tax preparation and e-filing fees, combined with usurious refund anticipation loans and check cashing fees, create a chain of abuse which our research indicates is diverting $1.75 billion annually from the intended EITC benefit to those working to lift themselves out of poverty.

In "The Price of Paying Taxes" we recommended that government needed to work to provide the working poor with access to free online tax filing options. The proposed Public-Private Partnership for free e-filing is a responsible and cost-effective way to meet this identified need. Effective public awareness campaigns by government will be critically important to the success of this initiative. However, much more needs to be done to address the totality of the plight of the poor, lest they be victimized by those targeting them and their EITC funds for profit. Specifically, government must work to educate the public about the true costs of refund anticipation loans, and to raise taxpayer awareness of the alternative options available to them for claiming their tax credit dollars.

In addition, the access of the poor to normal banking relationships is significantly below that for the rest of society, with the result that estimates indicate upwards of 4 million families earning the EITC today are "unbanked" and cannot benefit from direct deposit. Once again, government can play a critical role in helping educate lower income individuals and families about how they can establish successful relationships with mainstream financial institutions. In 2000 and 2001 Congress appropriated funds to the Treasury Department to initiate innovative programs to help "bank the unbanked." It is imperative that these kinds of education initiatives and pilot projects be aggressively developed to help the working poor help themselves. Even modest success could reduce the dependency of the poor on high cost refund anticipation loans and storefront check cashing services. Treasury Department leadership in this area, combined with additional support from Congress for these programs, could mean significant quality of life benefits for lower income citizens.

We are pleased to have had the opportunity to offer these comments in response to this Federal Register notice on these matters that are so important to the public interest.

Sincerely,

Robert D. Atkinson, Ph.D.
Vice President and Director, Technology & New Economy Project