USA Inc.: How government is embracing privatization

It is a sign of the U.S. government’s post-recession tilt toward privatization, a trend some experts worry could increase inequality, raise costs for consumers and erode the very idea of the public good: The Internal Revenue Service is hiring private debt collectors to recover overdue taxes. 

Starting in 2017, four private collection agencies will take on some cases that the IRS is no longer actively working on, the agency announced this week. It didn’t disclose how the bill collectors will be paid for their work. The move was mandated by a provision in the Fixing America’s Surface Transportation Act.

Although privatization of public services in the U.S. isn’t new, the government budget crunch that slammed federal, state and municipal agencies following the housing crash has sharply accelerated the move to outsource public services to for-profit entities. As tax receipts across government fell and politics largely blocked efforts to raise revenue, officials have sought to offset costs by contracting services out to private businesses. 

Yet privatization may not be the balm that lawmakers and elected officials hope. Privatization often leads to higher, and more, fees, while decreasing wages and benefits as government workers are replaced by lower-paid contractors, according to a report from policy research group In the Public Interest. 

A private business’ “goal will be to generate as much money as possible at the lowest cost,” said Donald Cohen, executive director of In the Public Interest. “At a larger level, we are taking what is a public responsibility and a public good and shifting the responsibility of payment to the individual. It turns us from citizens into consumers.”

The growing reliance on privatization around the U.S. has also come at a time when more Americans believe “the government can do no right,” Cohen said.

Meanwhile, privatization often leads to troubling outcomes for Americans.

Take the spread of for-profit probation companies, which are relied on by more than 1,000 courts to sentence hundreds of thousands of people to probation, often because of unpaid fines for traffic tickets and other minor infractions. For-profit companies such as Judicial Correction Services don’t charge the courts or towns for their services, which may seem appealing to elected officials. Instead, they make money by tacking on fees to the initial traffic ticket.

When Americans are unable to pay those fees, they can end up behind bars. In one case, a woman was arrested seven times​, served 25 days in jail and paid $640 after writing a check for $28.93 that bounced. 

Existing services that are privatized also often become much more expensive for consumers, In the Public Interest found.

Take the GED, a high-school equivalency test that was developed during World War II as a way to help returning U.S. soldiers and sailors demonstrate that they had the basic high school skills employers wanted. It was a pen-and-paper test that cost $30 to take -- until it was privatized.

In 2014, the nonprofit American Council on Education outsourced the test to the for-profit education company Pearson. The cost of taking the GED jumped $120 and switched to computer-based testing. Since then, the number of people taking the GED have plunged by two-thirds, along with the percentage of those who pass it. 

“Lots of different decision makers and people who opine may think, ‘An extra $90, what’s the big deal?’” Cohen said. “It’s a big deal for someone who is trying to get their GED.”

When it comes to the IRS, the agency has tried outsourcing tax collection before. It wasn’t successful. The National Taxpayer Advocate, Nina Olson, wrote in a 2008 report​ that the private program not only fell short of its collection goals, but also that it was “an inherently governmental function, which should only be undertaken by IRS employees trained to protect taxpayer rights.”

With its latest effort at privatization, the IRS said that its four private collections companies would have to abide by the consumer protection provisions in the Fair Debt Collection Practices Act. Yet debt collectors are no strangers to breaking the provisions in the law, with the Consumer Finance Protection Bureau collecting $13 million in 2014 in fines for “egregious debt collection violations.”

Privatization “is the most regressive way to pay for services, more than sales taxes or anything else,” Cohen said. “If our goal is to reduce poverty and crime, the last thing you would want to do is make someone poorer and trap them in debt.”