Government Executive - Authors - Jeff Shear

Promises, Promises

National Journal and Jeff Shear — Sat, 14 Dec 1996 00:00:00 -0500

provocative and disturbing chapter of a soon-to-be-published book by the redoubtable Brookings Institution has been making the prepublication rounds in Washington. Titled ``The Unfulfillable Promise,'' the chapter is a woeful portent of forthcoming federal budgets.

Surprisingly, however, the ``unfulfillable promise'' is not the stuff of welfare, medicare or social security, the budget's so-called entitlement programs. The chapter instead discusses discretionary spending--that is, the everyday business of running the country.

If significant changes in social security and medicare are off the table next year, only a small portion of the projected $1.6 trillion-plus in the government's fiscal 1998 budget would be available for cuts--in other words, discretionary spending.

``As a proportion of the budget, we are heading toward the smallest percentage of [nondefense discretionary] spending since the 1950s,'' Robert D. Reischauer, author of ``The Unfulfillable Promise'' chapter, said. The senior Brookings fellow and former Congressional Budget Office director also pointed out that ``those were the years before we had an interstate highway system, a space program, the Nuclear Regulatory Commission, the Federal Emergency Management Agency. There was no Environmental Protection Agency, no low-income housing programs, no Head Start. We didn't have the Departments of Transportation, Education, Energy, Housing and Urban Development [HUD].'' All of these programs fall under discretionary spending.

Congress and President Clinton will be hard-pressed to find more cuts in discretionary spending. In an effort to bring burgeoning budget deficits under control, Congress already slashed such spending by 45 per cent in the 1990 Omnibus Budget Reconciliation Act. The 1993 reconciliation act took another 18 per cent. When the Republicans came into power in 1995, they rescinded $16.4 billion from the fiscal 1995 act. They also attempted but failed to freeze discretionary spending in fiscal 1997. And the budget-meisters will cut more this round.

``But not much more,'' said Richard Kogan, a senior fellow at the Center for Budget and Policy Priorities, a Washington-based nonprofit organization that tracks the effects of federal spending on low-income people. ``Maybe we can do another 10 per cent. But not 22 per cent, as the President has proposed.'' Or 24 per cent, as Republican budget plans propose.

And there is pressure to increase spending on such discretionary programs as environmental protection, highways and housing subsidies.

Still, both Republicans and Democrats persist in the notion that they will be able to take huge whacks out of discretionary spending--with some adjustments in entitlement programs--and balance the budget. This is where the smoke and mirrors come in. Both parties will show big discretionary cuts by ``back-loading'' the biggest and most painful bites. That means that the smaller, achievable cuts will be reserved for the near term. After that, the bigger, tough cuts will be left for the next Congress to worry about. As the ``rosy scenario'' became emblematic of Reagan-era efforts to game the budget, back-loading is the legerdemain of the new stewards.

Why is it so tough to cut discretionary spending? After all, such spending represents about 33 per cent of the federal budget. And these are the only monies Congress actually votes to spend.

But to say that roughly one-third of the budget is ``discretionary'' is deceptive, because a hedgerow has grown up around the defense budget, which is labeled as part of discretionary spending.

Defense represents 16 per cent of the total federal pie. So just 17 per cent of the budget that is discretionary spending is truly so, and these ``nondefense'' discretionary outlays already have been cut to the bone. Moreover, about a third of what is left goes to the states, which are under increasing pressure to cope with dramatic changes in welfare, food stamps and other programs for the poor.

Money for law enforcement and public safety programs accounts for 19 per cent of nondefense discretionary spending. The voting public won't be likely to approve of cuts in those programs. The administration of entitlement programs costs another 4.1 per cent. That can't be cut without reducing services. (Entitlements themselves account for 49 per cent of the federal budget.) And then there are the untouchables: Veterans Affairs, the National Institutes of Health and the like, which represent 24 per cent of the $320-plus billion nondefense discretionary budget. What is more, many of these programs must grow, if only to keep up with inflation.

John M. Spratt Jr. of South Carolina, the newly ensconced ranking Democrat on the House Budget Committee, is candid--and skeptical. He thinks that budgeters have used the discretionary side of the budget as a ``plug,'' noting that ``it's the number that gets used to make the bottom line work.''

The only solution, if the nation is to cut spending, is to rationalize the agenda of government, according to Martha H. Phillips, executive director of the anti-deficit Concord Coalition and a former director of the House GOP Budget Committee staff. She said that means keeping those programs that are necessary and making them more efficient, and killing the rest.

That calls for hard choices. But politicians don't get elected by offering voters bitter pills.

The Republicans promised to downsize big government, and they ran into a political cross fire when they tried. Clinton has said that the era of big government is over. On Feb. 3, when he presents his new budget, he will have an opportunity to explain what he means.

``Policy makers are going to be under pressure to reduce discretionary spending at the same time they have to satisfy a variety of emerging claims and cost pressures,'' according to Paul Posner, director of the budget issues group at the General Accounting Office (GAO).

If that is the case, and it is true that all politics is local, then Members are going to be under the gun from their constituents to satisfy opposing principles: They must both spend and save. That could mean making promises they know they can't fulfill.

BUDGET OBSTACLES--AND VICTIMS

The repercussions of additional cuts in nondefense discretionary spending will be felt at all levels of government and among all parts of the public, especially the poor. It is this part of the budget that pays for the FBI, medical research, the Postal Service, national parks, veterans hospitals, public housing, roads, airports.

And what if defense spending goes up, as is likely and arguably necessary over the next five years? How much will the rest of the discretionary budget have to bear? According to Reischauer, the deepest cuts would come in community and regional development, agriculture, international affairs and energy.

By any fair measure, the poor took the biggest hit in the federal government's most recent efforts to balance the budget. A late-November study issued by the Center for Budget and Policy Priorities demonstrated that while low-income programs made up 21 per cent of nondefense discretionary spending, they bore 34 per cent of the cuts.

This, at a time when welfare has been limited to two years and federal job training programs have been cut 20 per cent below their fiscal 1995 levels, when adjusted for inflation. This also came at a time when youth-training grants have been cut 80 per cent, funds for homeless assistance grants have been reduced 31 per cent and the heating assistance program for the poor has been cut 36 per cent below the final, inflation-adjusted fiscal 1995 levels. And more such savings could be on the way, even though organizations such as the National Conference of Catholic Bishops and the Evangelical Lutheran Church of America have banded together to oppose them.

Economic choices ``determine who will be helped and who will be hurt and how we will move toward the future,'' said a statement on this issue from the Rev. William S. Skystad, chairman of the domestic policy committee of the United Catholic Conference.

Another big setback for the poor may be in store. A Sept. 16 letter from departing HUD Secretary Henry G. Cisneros to Office of Management and Budget (OMB) director Franklin D. Raines warned, ``The most critical issue facing the department in FY 1998 is the sharp increase in budget authority needed to maintain [federal] rental subsidies to nearly three million [housing] units'' covered by section 8 of the 1974 Housing and Community Development Act. Section 8 is a complex provision that provides rental subsidies for the poor. Under the program, 30 per cent of a resident's income goes toward rent and HUD picks up the rest, about $300-$500 a unit per month, according to the GAO.

Cisneros continued, ``The number of expiring section 8 contracts . . . grows precipitously over the next five years.'' This represents the period addressed by the fiscal 1998 budget. ``In FY 1997,'' Cisneros wrote, ``contracts covering 833,500 units will expire.'' In 1998, that number will leap to 1.8 million units. Here's the upshot, according to Cisneros: Whereas the fiscal 1997 budget required about $4 billion to cover the renewals, the budget authority needed in fiscal 1998 will more than triple, to $13.5 billion.

HUD faces a double whammy. The 15-year and 20-year housing contracts the department wrote in the 1970s and '80s are coming due. In the past, as these long-term contracts expired, HUD renewed them but saved money by shortening the length of the contracts. More and more contracts were signed for one year, not 20. The shorter the contract, the less budget authority HUD needed to request from Congress. These contracts must also now be renewed. Cisneros wrote: ``HUD will be renewing more than three-quarters of all section 8 units each year by FY 2000.''

Here's what is critical. Section 8 addresses the housing needs of only about 25 per cent of the nation's poor. Obviously there isn't the money to expand the program, and keeping even will be no small achievement. HUD hopes to sustain the program by manipulating cash flow. The money the agency needs for entering into contracts, known as budget authority, is zooming, but the spend-out rate, money referred to as outlays, trickles through the budget pipe more slowly. And it is the outlays that count toward the deficit.

HUD is counting on internal reforms to contain these outlays. From now until 2002, yearly outlays would grow to only $17.1 billion, just $1.2 billion above current levels. That means HUD must hold outlay increases to 1 per cent per year, far below the rate of inflation. No small feat. Without reforms, which would entail a struggle with powerful private-sector interest groups, outlays could increase by $7 billion, or much more. And that would count toward the deficit.

The problem in all of this is that the discretionary budget is subject to caps on both budget authority and outlays. With a $9.5 billion leap in HUD's budget authority, appropriators will find it difficult to stay below caps that are increasingly stringent.

``We're looking at a time when the government is going to have to face a huge jump in spending,'' Judy England Joseph, the director of the GAO's housing division, said. ``We're looking at sums way beyond what Appropriations Committees can fund.''

The contract renewals that HUD faces are ``discretionary obligations,'' something of a contradiction in terms. As a practical matter, they bear the same ineluctable costs as entitlements. Costs are not driven by laws requiring increased expenditures as population and the economy change--more elderly moving into social security, for example, recessions, inflation. They are driven by rising rents, and unless congressional appropriators are prepared to cut eligibility rolls or landlords are willing to accept more-austere terms, costs will swell.

NUCLEAR WASTE CLEANUPS

Another such discretionary obligation that Congress can look forward to is the cleanup of nuclear waste sites--for instance, the Hanford Nuclear Reservation located in an arid region of Washington state. East of the Cascade Range and half the size of Rhode Island, Hanford has been ``stabilized'' for now. That is, its 140 underground tanks that contain cast-off radioactive materials are no longer considered to be in danger of nuclear detonation and leaking. Hanford once made plutonium, a radioactive metallic element that does not occur in nature but is necessary for both hydrogen and atomic bombs. One of its isotopes has a half-life of 76 million years.

In 1989 and 1990, the Energy Department entered into agreements with states to clean up sites such as Hanford, which alone contains one-third of all the nation's environmentally critical weapons facilities. Two things were unknown to Energy when it cut the deal: how to do the cleanups and how much they would cost. The agreements were made for the purpose of keeping the sites operating. Moreover, the expectation was that Congress would ultimately abrogate these agreements when the full costs became known (which is still possible).

Having completed the study phase of such problem sites as Hanford, the Energy Department discovered that the full, 30-year cost of a site restoration, including remedying groundwater contamination, would make the $200 billion-plus savings and loan cleanup look like a trifle. Hanford will cost at minimum $50 billion over the next 20 years, and it will never be pristine.

And there's a kicker. Failure to complete these cleanups is subject to substantial penalties. The federal managers of these programs can be held personally responsible for agreements signed with local regulators. If administrators do not ask OMB for the necessary funds to complete the work, they are subject to criminal action. What would happen if Congress refused to act on the request may soon be tested.

According to GAO sources, the costs of Hanford's cleanup during fiscal 1998 will be about $6 billion, and costs will increase a billion a year, to $10 billion by 2002. At the moment when Energy will need the most money, the back-loaded federal budget will have the least to spend.

STATE DEPARTMENT BLUES

``Pretty bad'' is how a State Department official described the situation as he began to discuss his department's budget. At first he spoke in measured diplomatic tones, then with increasing rancor. ``Over the course of the last 11 years, the international affairs budget has declined 50 per cent . . . in inflation-adjusted dollars!'' Thirty U.S. embassies and consulates have been closed worldwide.

Recent polls have demonstrated that the public thinks U.S. foreign aid expenditures are budget busters that add some 25 per cent to the cost of running government. In fact, the entire State Department budget, including embassies, the Peace Corps and foreign aid, represents only 1.2 per cent of expenditures.

``We don't spend money on foreign aid,'' the official said, as he tried to correct the semantics of the debate. ``Fighting global environmental degradation is not foreign aid. Preventing the world's population from exploding isn't foreign aid. Stamping out smallpox and now polio is not foreign aid. Stopping nuclear proliferation is not foreign aid. It may help others, but it protects us at home. These are minuscule amounts of money compared to what it would cost us to fall back into our old Cold War ways.''

In fiscal 1996, the State Department budget request was $21.2 billion. Congress provided $18.5 billion. In fiscal 1997, the department requested a more modest $19.2 billion and was cut back to $18.3 billion. ``There is no international organization to which the U.S. belongs where our payments are not in arrears,'' the State official said. ``We are turning national debt into international debt. That makes our leadership position in the world more difficult.''

HOW TO PAY FOR THE ENVIRONMENT?

With the Cold War over, Americans are looking inward, and congressional appropriators have to be a little worried about what the voters are seeing. For one thing, the GOP Congress had hoped to save money in the domestic nondefense discretionary budget by cutting back on environmental spending. It worked closely with business interests to rewrite regulations and curtail strict enforcement. In a poll by the Roper Center for Public Opinion Research Inc. in November 1995, only about 1 per cent of those questioned listed the environment as their big concern.

But the environment turned out to be a hot-button issue with voters. It became a key issue for the President with which he spanked the Republican Congress and opponent Robert Dole. Stanley B. Greenberg, a prominent Democratic pollster, found that in eight of nine surveys he tracked after the 1996 election, the environment was No. 1 of two factors in voters' decisions to oppose candidates.

If congressional budgeters respond to these concerns, it could cost them. For example, they will have to find money to finance the huge new stretches of wilderness declared national parklands in Utah. But if they balk, it could still be costly: Last year, when Sen. Conrad Burns, R-Mont., co-sponsored legislation to pull nearly 300 million acres of land from The Federal Register, local hunters fired off protests to his office. They feared losing access to Bureau of Land Management hunting grounds. Burns quickly backpedaled and helped vote down his own effort.

Then there is the perennial environmental issue of the superfund. Cleanups of many toxic waste sites have become symbolic of the federal government's best and worst efforts. Last year, both chambers of Congress passed legislation to roll back federal cleanup requirements. That backfired.

But the White House may have set itself up for a similar fall. During the campaign, the Administration scored points by noting it had cleaned up 197 waste sites, more than all the cleanups during the Reagan-Bush years. The President then promised to clean up 500 more sites by 2000. That promise could add up to real dollars.

THE HIGH COST OF HEALTH CARE

And then there's AIDS. In May, the 1990 Ryan White Comprehensive AIDS Resources Emergency Act was reauthorized. Spending rose from $633 million in fiscal 1995, to $736.1 million in 1996 and to $906 million in fiscal 1997. The money fills the gaps left by private care. States and hard-hit metropolitan areas also receive money. But these state programs have never reached the authorized $250 million-a-year spending level, topping $195 million only in 1995.

As is the case with many social problems, costly programs in the near term may avert out-of-control costs over the longer term. A new and costly cocktail of drugs known as protease inhibitors has shown dramatic results in curtailing symptoms and early death from one of the worst pandemics this century. In its fiscal 1997 appropriation, Congress said the Health and Human Services Department should speed clinical trials of these drugs for pregnant women and for children who have AIDS or are HIV-positive. The wholesale price for a year's supply of one such drug, which is used to supplement treatment and not to supplant other drugs, costs about $5,800.

About three-fourths of state AIDS drug assistance programs now pay in whole or in part for protease inhibitors, but costs are exploding. Plans to restrict access to these drugs, through waiting lists or caps, are under way. Some state programs report that their costs doubled or tripled from January to July. Program supporters claim savings of $47,000 per year per patient through the intervention of protease inhibitors. That represents real savings because the current costs for treating AIDS patients from diagnosis to death range up to $200,000 per person.

THE EXPENSIVE ROADS AHEAD

The biggest budget buster, not to mention battle, of the 105th Congress could be a program known as ``iced tea.'' ISTEA is an acronym for the 1991 Intermodal Surface Transportation Efficiency Act. The program supports the nation's highways and mass transit system.

Financed for six years, beginning in calendar year 1992, the $155 billion plan must be reauthorized this year. This money goes into a trust fund, which contains a surplus. Most likely, the reauthorization will be for a shorter period, four years, which reduces the burden on the budget. The powerful American Trucking Associations (ATA), however, will push for an increase in annual spending from the trust fund from approximately $20 billion a year to $30 billion.

``This is going to be a battle royal, first at the Budget Committee level, where they have to divvy up a shrinking pie,'' Kenneth D. Simonson, vice president and chief economist for the ATA, promised. ``The slice for transport is going to be a tug-of-war between aviation interests and surface, between highway transit and rail, and then state by state over how much money they will get from federal formulas.''

The Book of Genesis speaks of seven fat years followed by seven lean ones. In 1990, Congress put the nation's budget on a diet. Now it will attempt to add a few even-leaner years on top of the previous seven. Whether that is do-able is doubtful.

One bright spot in an otherwise dark discretionary picture is that the explosive growth in entitlement costs may be abating. A study by the Federation of American Health Systems, which represents privately owned hospitals and health sys- tems, shows what the federation characterizes as a ``giant'' drop in medicaid costs. The federation projects that program costs will fall by some $176 billion by 2002.

This potentially takes some pressure off the nondefense discretionary programs in the budget. Projected reforms in medicare might have an additional beneficial effect. There is also the prospect for a change in the way yearly social security increases will be calculated. None of this, by any means, is certain, however. One or two good years and unexpected years of slower growth may or may not represent a trend.

``The caps expire at the end of the fiscal year 1998 budget cycle,'' Stanley E. Collender, a managing director of the Washington office of the New York City-based public relations and public affairs firm Burson-Marsteller, said in an interview. The caps are the limits on discretionary spending that were instituted in 1990 and reauthorized for five years in 1993. They have effectively held down the growth of spending on the nonentitlement side of the budget and have never been breached. ``We are likely to see them reauthorized again this year, because it's not an election year,'' Collender said. He thinks that there is a shot at savings on entitlements but that the discretionary caps will still be lowered. ``The thing that should never be forgotten, however, is that politicians like to spend money on what they can take credit for.'' What that may mean is more promises and less money to fulfill them.

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Fiscal and Economic Policy: Making Ends Meet Won't Be Easy

Julie Kosterlitz, National Journal, Ben Wildavsky, and Jeff Shear — Sat, 16 Nov 1996 00:00:00 -0500

TREASURY DEPARTMENT

aving ridden into his second term in large part on the strength of the national economy, Clinton was hardly likely to dump Secretary Rubin.

Rubin, the low-key former investment banker who was, early in the President's first term, head of the NEC, has won points for keeping the Administration focused on deficit reduction and for his adroit handling of various potential crises, from a falling dollar to the Mexican bailout. When House Republicans refused to raise the debt limit to pressure Clinton during last year's budget standoff, Rubin's deft maneuvering allowed the government to keep paying its bills anyway, and to keep the presssure on the House.

Rubin wants to stick around for the entitlement reforms he considers key to continued deficit reduction, and to prove the economic Cassandras wrong about an impending recession. He'll also focus on pet projects: finding new ways to channel capital to inner cities, rolling out his promised new inflation-indexed bonds and using the bully pulpit to exhort spendthrift Americans to save more.

NATIONAL ECONOMIC COUNCIL

With director Laura D'Andrea Tyson headed back to Berkeley, Calif., some analysts say the NEC is at a crossroads. The council is supposed to coordinate the Administration's economic policy making, and Tyson's critics faulted her for not doing enough to prevent end runs to the President by Cabinet members.

``The President has to decide, does he want the NEC to be restored to the role it had in its first two years under [Treasury Secretary and former NEC head] Rubin?'' a trade lobbyist said. ``That is not a question of structure, that's a question of personality and the perception of who is head of it.''

Candidates to replace Tyson include deputy national security adviser Berger and Tyson's two deputies: Gene B. Sperling and Daniel K. Tarullo. Still another name that's been bandied about for the top NEC slot: Princeton University economist Alan S. Blinder, former vice chairman of the Federal Reserve and a onetime colleague of Tyson's on Clinton's Council of Economic Advisers (CEA). Along with good managerial skills, Blinder would bring a track record as an economic popularizer--he once wrote a monthly column for Business Week. But he's not a political heavy-hitter, which some argue is a vital quality for anyone who wants the NEC to have a central role in policy making. If CEA chairman Joseph E. Stiglitz moves on, Blinder could well be a candidate for that job.

OFFICE OF MANAGEMENT AND BUDGET

By all appearances, OMB is a happier place these days. That's because for the first time since the beginning of the Administration, Panetta is out of the picture. Though much admired, the former OMB director and White House chief of staff was first and foremost a political animal. And that, some at OMB thought, got in the way of a budget agreement.

Franklin D. Raines, who in September was confirmed as OMB's latest director, ``is re-energizing the place,'' an analyst who's familiar with the agency's operation said. Not that Raines's immediate predecessor, Alice M. Rivlin, wasn't highly regarded and capable. But she always had Panetta looking over her shoulder and negotiating for her. ``Leon is a brilliant budgeter, but he's a politician,'' the source said. Raines, a former vice chairman of the Federal National Mortgage Association and an OMB figure during the Carter Administration, has already called for early budget talks involving both ends of Pennsylvania Avenue.

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Folded, Spindled . . .

National Journal and Jeff Shear — Sat, 05 Oct 1996 00:00:00 -0400

NATIONAL JOUNRAL
Vol. 28, No. 40

Democrats, Republicans and even Ross Perot have vowed to transform--and perhaps eliminate--the IRS. They cite inefficient management, ineffective modernization, intrusive collection methods. Yet some critics also say that many of the agency's problems are not its fault.

roud, secretive, powerful--and, some charge, incompetent--the Internal Revenue Service (IRS) has been challenged by a Democratic Administration and a Republican Congress to either roll into the 21st century--or get rolled.

A veritable posse has formed to run it down. In just one day in mid-September, a fusillade sprayed the revenue boys: A Senate oversight committee held hearings critical of the IRS's management; a special congressional commission convened to examine the agency's future; and two reports from Congress's investigative arm, the General Accounting Office (GAO), questioned its capabilities. By summer's end, the GAO had issued at least 14 such reports since early this year.

And while the candidates bandy tax cuts and reforms about the hustings in this presidential campaign season, it is the tax man who gets caught in the cross fire. GOP presidential nominee Robert Dole has pledged to ``eliminate the IRS as we know it'' and has called the service ``intrusive'' and ``oppressive.'' Reform Party candidate Ross Perot titled one of his recent infomercials ``Power to the People, the End of the IRS.''

The Republican Congress would, if not ``tear the tax system up by its roots,'' as House Ways and Means chairman Bill Archer of Texas has urged, at least prune its branches. The Senate version of the fiscal 1997 budget called for $1.1 billion less than the Administration's $8.06 billion IRS budget request. The House would have cut even more. IRS spokesman Frank Keith said, ``That would be devastating.'' In the end, the amount Congress appropriated--$7.03 billion--came closer to the Administration's request but was $315 million less than the fiscal 1996 appropriation.

Congress has come to see the IRS as a money pit: Its budget has nearly tripled since 1979, but tax returns haven't been processed much faster than in the past, nor have collections increased significantly. Modernization has seemed ``chaotic'' and ``ad hoc,'' according to language in the fiscal 1996 appropriations bill. Worse, for four years running, the IRS has flunked the very sort of financial audits for which it penalizes taxpayers.

The ``IRS has not yet been able to provide support for major portions of the information presented in its financial statements, and in some cases where it was able to do so, the information was found to be in error,'' Comptroller General Charles A. Bowsher wrote in a July GAO report.

The IRS is aware that it has some problems but also notes that politics is involved. ``There's a presidential election under way,'' an IRS spokesman said in response to the recent criticisms. ``We're an agency in transition, and there have been things that the IRS hasn't done well.''

The IRS spokesman referred to recent comments by deputy Treasury secretary Lawrence H. Summers, who told a congressional committee that the agency's efforts to modernize had gone ``badly off track. . . . The criticisms are fundamental, and they go to the heart of the program.''

Still, rebukes of the IRS are not aimed at its integrity, as was the case during the Watergate era. Critics reproach the IRS for its management or, some say, mismanagement of a transition into a consumer-oriented universe.

Reform is the word of the hour. Until now, it was expected that the IRS would reinvent itself. Beginning in January, for instance, the sprawling bureaucracy that employs 106,000 people will trim 5,000 jobs, largely on its own initiative.

But the core program in the IRS's 10-year-old streamlining effort has foundered, to the tune of billions of dollars. ``A $500 toilet seat,'' a congressional aide said of the super-project known as Tax Systems Modernization (TSM), an effort to bring the IRS's paper jam of an operation into the digital era.

The problem, according to critics and supporters, is that the IRS is an overweening hierarchy dishing out a menu of intransigence and inefficiency. Its management structure was bred in the 1950s; its forms are too complicated for many to read; its telephone help lines often go unanswered or provide incorrect information. Too often, the IRS can seem to be an enigmatic bureaucracy functioning beyond due process or appeal.

A result of the IRS's Kafkaesque image, not to mention its all-too-real failings, is that the initiative for reform is slipping away from the agency. Increasingly, appropriations and oversight committees, special commissions and private consultants are determining its future.

This movement from internal to external reform marks a turning point, but it may also be the agency's last, best hope, according to Christopher E. Bergen, the editor of Tax Notes, the tax practitioners' answer to the entertainment industry's Variety. ``The IRS has a bunker mentality,'' he said in an interview. ``It may even be an agency in danger of going out of control.

``But,'' he continued, ``it should not be made a part of the debate surrounding the tax system. The IRS and the flat tax are separate issues. The complexity of the tax system isn't its making; it's Congress's. But [IRS officials] get sucked into the debate because they make themselves a target.'' In many ways, the agency is its own worst enemy. ``You don't necessarily need a tax lawyer to run the IRS,'' Bergen said. ``You need a general. Someone who won't be captured by the bureaucracy.''

Congress, Heal Thyself

In the last days of summer, the IRS and its plans for reform ran out of time. Congress began laying down ultimatums and ordering budget cuts. The era of self-reform had passed.

A tough House Appropriations Subcommittee on Treasury, Postal Service and General Government last year forced the first real budget cuts in the IRS's 60-year history, lowering its fiscal 1996 appropriation by 2 per cent. Subcommittee chairman Jim Lightfoot, R-Iowa, has called the agency's TSM project a ``$4 billion rat hole.''

The Treasury-Postal appropriations bill, which finances the IRS, had stalled in the Senate but was folded into the omnibus appropriations bill that Congress passed on Sept. 30 to avoid the preelection debacle of a government shutdown.

The total TMS appropriation of $336 million is almost half what the Administration had sought for fiscal 1997, and the measure has fenced off the fourth-quarter apportionment for TMS--about $50 million. ``The money is there,'' Lightfoot said in an interview, ``but for the IRS to get it, they're going to have to bring forward for the first time in their history a design showing how they intend to use and spend this money, and the time frame in which they're going to complete their effort.''

The Senate has shown little sympathy for the IRS. Governmental Affairs Committee chairman Ted Stevens, R-Alaska, has conducted four hearings this year on IRS modernization problems. A GAO report prepared for the panel's final hearing found that Cyberfile, a $22 million project designed to allow taxpayers to submit returns through their home computers, was a failure. Stevens called it a ``fiasco.'' Cyberfile, the GAO said, was ``hastily initiated,'' its development was ``undisciplined'' and the project was ultimately ``poorly managed and overseen.'' As a result, Cyberfile was not delivered on time and was suspended after $17.1 million had been spent on it.

Ironically, taxpayers may already file by home computer, as was planned under Cyberfile, but through private on-line services, which typically charge a fee of about $15. The chief virtue of Cyberfile was that it would have eliminated this small fee.

Governmental Affairs ranking Democrat John Glenn of Ohio, considered by many to be a friend of the IRS, has long tried to work the bugs out of the modernization. ``The problem for the IRS is complexity,'' he said. ``They do hundreds of millions of transactions each year, and by and large, they do an amazingly good job with outworn equipment.''

A sampling of the IRS's own figures shows that it processes 200 million tax returns annually and handles 1.1 billion information returns, such as correspondence and collection notices. In addition, the service annually determines the tax status of some 60,000 employee compensation plans and examines the status of 90,000 exempt organizations. The $1.4 trillion a year it takes in as tax revenue dwarfs the bottom line of even the largest multinational corporations.

Glenn said, ``Our tax code has gotten so complicated, it's difficult to think that anyone could run it. In fact, the problem with the IRS starts right here in Congress. We're the ones who keep changing the rules. It's up to us to clean up the tax code.''

Customer Service

The first public meeting of the National Commission on Restructuring the Internal Revenue Service, on Sept. 10, marked perhaps the most ambitious bid to take over reform of the IRS. An amendment by Senator Robert Kerrey, D-Neb., to the fiscal 1996 Treasury-Postal appropriations bill established the 17-member, bipartisan commission, which Kerrey co-chairs with Rep. Rob Portman, R-Ohio.

The commission, whose members also come from the executive branch and the private sector, officially began work on Aug. 28 and is to report its findings on June 15, 1997. In an interview, Kerrey said that its goal is to structure an IRS that treats taxpayers as customers. He said he thinks the agency should provide the same level of services as do private corporations. Citing a prominent credit and financial services company as an example, Kerrey said, ``I don't think it's utopian at all to imagine an IRS working as well as that.''

The Portman-Kerrey panel will address six ``core'' issues that the commissioners say will ``ensure an effective and user-friendly federal tax administration system'': high-quality service to taxpayers; a fundamental review of the agency's organizational structure; a review of employee training and creation of incentives to motivate and retain a skilled workforce; a systematic move toward state-of-the-art technology; improved financial accountability for the agency; and the simplification of tax administration.

As Kerrey sees it, Glenn is correct. Congress is as much a part of the IRS's problem as it is a part of the solution.

Kerrey said that during the Sept. 10 session he asked IRS commissioner Margaret Milner Richardson ``if it was the Congress that had made her work at reforming the IRS more difficult, and she replied yes. But when I asked her if she ever appealed to the President to veto problematic legislation, she said no.''

Kerrey said he had not expected the commissioner to defy President Clinton or make his job more difficult. Kerrey sees a complicity of silence on the part of both Democrats and Republicans to go along to get along. ``A conspiracy,'' he called it. ``We go out and explain to citizens that the IRS isn't doing a good job,'' he said acidly, ``then we enact changes to make its job harder.''

Commission co-chairman Portman also zeroed in on Congress. ``We have to look at the tax code, in which Congress could help the IRS do its job through simplification and fewer changes in the law each year or each month.''

But finding the silver bullet necessary to end the tribulations of the tax agency will be difficult at best. Bergen, Treasury Department union chief Robert M. Tobias and others involved with the IRS say that it may be asking far too much of the Portman-Kerrey panel.

And a well-regarded expert on the Treasury and IRS said, ``The structure of this commission is disastrous. It's very politicized, and it could be pulled apart ideologically. Here's a classic instance where a balanced view is necessary to sort out complex programs. You need people with analytical expertise, and that's not here. With the people appointed to this commission, that sort of ideological crap will always be on the table. It's frustrating.''

One of those appointed to the commission is Grover G. Norquist, president of Americans for Tax Reform, who has taken radical stands on tax issues.

Norquist is a close adviser to House Speaker Newt Gingrich of Georgia. A political conservative and economic libertarian, he has long maintained that slashing revenues is the most direct route to downsizing government. He sees the IRS, for example, as an organization that intrudes on people's privacy. But simply shrinking the IRS would not solve the problem, he said.

Norquist recounted an allegorical joke he told recently at the annual meeting of the Christian Coalition: ``A fellow walks into a bar and orders a bourbon and Coke, and immediately becomes ill. The next day he goes to the bar and orders a bourbon and branch water. He gets sick again. On the third day, he tries bourbon and soda, but still gets sick. Suffering, the man mumbles to the bartender, `One of these days I'm going to find a mixer that doesn't make me sick.' ''

Norquist concluded, ``The central question is how much money the federal government takes, and that certain taxes are more intrusive than others. That's not the fault of the IRS, that's the fault of the tax code.''

There are those, however, who suggest that the commission's ideological diversity may work in its favor. Of the panel's wide-ranging makeup, former IRS commissioner Lawrence B. Gibbs said, ``That's real life out there.'' He noted that there are ``thoughtful'' members on the commission and that much of the responsibility for its success lies with its staff.

And even Norquist allows that the tax agency's travails are not a partisan issue. He applauded the commission's chief of staff, Jeffery S. Trinca, former chief tax counsel to Senator David Pryor, D-Ark.

Trinca largely crafted Pryor's 1988 Taxpayer's Bill of Rights, which built more due process into the public's dealings with the IRS. Trinca marshaled support for the successful measure through a coalition that included Norquist, Republican Senator Charles E. Grassley of Iowa and conservative David L. Keating, the executive vice president of the watchdog National Taxpayers Union--all of them Portman-Kerrey commission members. (Clinton signed an updated version of the bill this summer.)

Trinca operates the commission with a $1 million budget and 10 paid employees. He also has volunteer help. He said of his volunteers, ``These are top-flight people willing to work for free to fix the system.''

``The IRS was due for a commission like this one,'' Keating said. ``The IRS believes its mission is to collect taxes whether they are owed them or not. Getting them to change its culture is a difficult and hard task.''

Gibbs, who served during President Reagan's second term, testified at the commission's first public meeting. In an interview, he expressed confidence in the panel members' approach. ``That they chose quality and customer service as the focus of their first public meeting was good news to me,'' he said. ``It's time we begin to ask the question, what do we want from the IRS? There's no magic fix. You have to motivate, train and equip.''

In 1985, the year before Gibbs became commissioner, the agency's computer problems were so serious that 85 million tax refunds were delayed.

Gibbs told the Portman-Kerrey commission that although he overcame that problem, fixing the IRS was not an organizational or management issue. Rather, he said, it was a matter of ``empowering'' the agency's workforce.

Gibbs believes that too much responsibility is foisted on the IRS. It becomes the organization of last resort for solving the problems of other branches of government. He cited the agency's oversight of charitable contributions, pensions, student loans and child support, as well as its role in tracing funds used by drug dealers and money launderers. ``It was left to the IRS to catch [Al] Capone and [Jimmy] Hoffa, because they were the only . . . agency that could,'' Gibbs said, citing the income tax evasion cases of the Chicago mobster and the Teamsters Union leader.

IRS Makeup or Makeover?

Tobias, president of the National Treasury Employees Union, which represents IRS workers, said in an interview that the IRS has a problem with public perception. Agreeing with Gibbs's assessment, he said, ``The IRS should be focusing on customer satisfaction so the public will understand the need for compliance.''

Polls conducted for the Portman-Kerrey commission show that customer satisfaction with the IRS is falling. Yet the IRS's own evaluations indicate steady improvement in agency performance.

So where is the disconnect?

Tobias noted that most taxpayers are compliant. He quoted IRS figures that show 80 per cent of taxpayers are 99 per cent compliant. ``Those are people using standard deductions,'' he said. ``They aren't complaining about the tax code. It's the rich who complain and use the IRS as an excuse. They just want to change the tax code in their favor.''

According to a poll conducted by the Roper Organization Inc. in June, the IRS's favorability rating among the public rose 5 percentage points to 41 per cent from 1995-96, although this figure is still below the 50 per cent approval rating it received in 1990. Since 1983, the popularity of the IRS has been in close lockstep with that of other federal agencies.

``The performance of the IRS has not been getting worse,'' Portman-Kerrey commissioner James W. Wetzler said. ``In fact, it's been improving by almost any measure.'' Wetzler, a director in the New York City office of the Big Six accounting firm Deloitte & Touche, said the problem is that the IRS has not been keeping pace with the private sector. ``So, in the public's view, the IRS is losing ground.''

In 1987, C. Eugene Steuerle, then deputy assistant Treasury secretary for tax analysis, tried to achieve many of the same administrative reforms that the Portman-Kerrey commission seeks. ``Our aim then was tax simplification,'' he said.

Steuerle, now a tax expert at the Urban Institute, pointed to Clinton's and Dole's tax proposals: ``Those changes aren't going to simplify the tax code. They're going to make it vastly more complex.''

Simplifying the tax code is ``very tedious work,'' Steuerle said. ``It's not at all glamorous. It's line-by-line, and every change creates winners and losers. So you pay a political cost to get there.''

And that is the irony that the IRS and those who would change it face, Steuerle said. ``In an effort to bring fairness into the system, you can't avoid complexity.''

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