State House balks at proposal to privatize delinquent tax collection

Gov. Ned Lamont's administration wants to sell the state's outstanding tax debt to private collection agencies, but the General Assembly isn't ready to go along with that — at least not yet.

The House of Representatives amended a bill Thursday that would have empowered the Department of Revenue Services to go the private route. Instead, it directed the agency to study how the process would work and report back to lawmakers next January.

The revised bill, which now heads to the Senate, also directed the Department of Revenue Services and the attorney general's office to report by next

Feb. 15 how much in delinquent tax payments the state will have recovered by itself, via lawsuits, in the 2022 calendar year.

“While municipalities do this all the time, no state has done this before,” Rep. Sean Scanlon, D-Guilford, co-chairman of the Finance, Revenue and Bonding Committee, said shortly after the House vote.

And while options to enhance tax collections should be seriously looked at, Scanlon added, “I think our caucus wanted more information.”

The amendment replacing the authorization to use privatized collection with a mandate to provide more information passed by a voice vote in the House with overwhelming support from both parties.

“Aggressive practices are not unknown in the debt collection world,” said Rep. Holly Cheeseman of East Lyme, ranking House Republican in the finance committee, who said lawmakers from both parties fear the tactics some private collection firms might use.

Many people who fall behind on their taxes amidst the coronavirus pandemic and skyrocketing inflation are not out to cheat the state, she added.

And the Internal Revenue Service's Taxpayer Advocate Service agrees with Cheeseman.

An independent office within the IRS tasked with helping taxpayers, it classified privatized collections as one of the IRS' “most serious problems” in its 2017 report to Congress.

About 44 percent of all taxpayers targeted by private collection agencies on behalf of the IRS “are at risk of economic hardship.”

The median income of households targeted by collection agencies that later entered into installment agreements to repay their debt was $38,021, the report states.

“With unacceptable frequency,” the Taxpayer Advocate Service added, “taxpayers whose debts are assigned to PCAs [private collection agencies] are placed in installment agreements they cannot afford.”

Mark Boughton, the commissioner of the state Department of Revenue Services, noted that filers earning around $38,000

annually would have little or no state income tax liability in Connecticut, which offers various credits and exemptions to help its poorest households.

But in Connecticut, where the cost of living is much higher relative to other states, a family can make more than $38,000 per year and still struggle.

The United Way of Connecticut estimates that a household with two adults and two young children must earn $90,660 annually to afford food, utilities, housing, medical and child care and other basic “survival” needs.

It reported earlier this month that 42 percent of all children in this state live in households that earn less than this threshold.

Boughton also told the CT Mirror in a recent interview that the administration might want to pursue privatized tax collection in a different manner than the IRS has.

Rather than retain a private agency to collect the money for the state, the department is looking to sell debt, for pennies on the dollar, to a private firm or firms. The state then is out of the process, and it's up to the private companies to collect what they can.

Connecticut has more than $1.2 billion in tax debt — much of which is more than 10 years old — that it deems either uncollectable or not cost efficient to pursue.

“We've exhausted every method we have to collect these dollars,” Boughton said. He estimated the legislature would have to quadruple the department's 45-member tax collection team for the state to recover enough debt to match the cost of pursuing it.

Boughton also acknowledged that private agencies can employ some tactics lawmakers are concerned about, including repeated letters, phone calls and attacking tax delinquents' credit ratings. But he also noted the state can and has employed those same methods.

The difference, though, is that the state of Connecticut must answer to the levels of public reporting and accountability that private collection agencies do not, countered Jeff Gentes, who manages fair lending and foreclosure prevention programs for the Connecticut Fair Housing Center, which opposed the Lamont administration's proposal.

Private firms often wait after purchasing debt, allowing interest and penalties to accrue to maximize their profits, said Gentes, who also co-supervises the Yale Law School Housing Clinic.

Only after a large potential return is owed will they confront debtors, some of whom may be unaware they are delinquent or may badly underestimate how much they owe.

“It's just cowardly,” he said. “If you have a problem with the fact that one of the residents owes you money, foreclose yourself.”

CTMirror.org / File photo Gov. Ned Lamont and his tax commissioner, former Danbury Mayor Mark Boughton.