Brian Flaxman—A Tale of Bipartisanship and Financial Interests: The Taxpayer First Act of 2019

Brian Flaxman

Brian Flaxman

I am pleased to have another guest post from Brian Flaxman, a PhD student here at the University of Colorado Boulder. Brian’s first guest post here was “Yes! Economics Did Sway Obama Voters to Trump.” Below are Brian’s words:

On March 28 of this year, the Taxpayer’s First Act of 2019 was proposed and sent to the House Ways and Means Committee and Financial Services Committee. It made its way out of both committees and passed the House on April 9th. It was sponsored by Democratic Rep. John Lewis, and had 18 Democratic Cosponsors and 10 Republican Cosponsors. Among two of the cosponsors were head of the Ways and Means Committee Democratic Rep. Richard Neal, and the ranking Republican on the committee Rep. Kevin Brady, considered to be one of the architects of the controversial Tax Reform Bill passed at the end of 2017. In fact, there was such a large support for the bill, it was able to be passed with a voice vote rather than the standard role-call vote. This act of bipartisan support for the legislation may be seen by some as a rare moment in today’s political climate. However, the problematic nature of this legislation is a prime example of why bipartisanship should not be heralded in and of itself.

Many of the provisions in the bill are positive for the everyday tax payer, including the institution of an independent appeal process for taxpayer discrepancies that avoids litigation and creating several measures to crack down on IRS corruption. However, the bill continues indefinitely the IRS Free File program. This program, created in 2002 and set to expire in 2021, allows for low-income taxpayers to use private sector tax-filing software for little or no cost. However, this program also explicitly forbids the IRS from creating its own publicly available tax filing software. And permanently codifying the entire program also indefinitely prevents the IRS from producing a viable, cost-effective, competition-increasing alternative to privately available software. While bad for the average American, the tax preparation industry benefits from this measure significantly. It is therefore no surprise then that preventing the IRS from creating such software is a long time priority by the tax preparation industry.

If the Free File program was successful, the argument could be made that keeping it in place while continuing to ban the IRS from creating competing software is a tradeoff that ends up benefiting the American public. In practice though, the American public has seen minimal benefit as the program is massively underutilized. Only 3% of the taxpayers that qualify for the program (70% of the public is eligible) end up using the Free File program. According to estimates by Pro Publica, while the program has saved taxpayers $1.5 billion in 16 years, taxpayers eligible for the program spend an unnecessary $1 billion dollars per year on tax filing software. This is because tax-preparation companies have actively tried to minimize the usage of the program by obscuring its presence in two different ways. First, Intuit customer service representatives actively steer clients away from the Free File version to a basic free version and are told to mention the program only when specifically asked about the Free File program. This in many cases leads to eligible taxpayers unnecessarily paying for their tax preparation.

However, the main way they are able to obscure the presence of the program involves both their website’s design and intentional manipulation of search engine optimization. TurboTax’s main website does not contain the Free File version of their program called the “Freedom Version,” while barely mentioning its existence. In fact, one of the only mentions of the Free File version is hidden away in their FAQ, where they plainly admit that it is not on their main site.

However, on their main website where they advertise their list of products, TurboTax prominently displays a basic free version completely separate from the Free File of their program that handles some basic filings, but then upsells other services.

Source: TurboTax Website

Source: TurboTax Website

And the lack of public knowledge about the program is furthered by manipulating search engine results by paying for ads. For example, a simple search of “IRS Free File Taxes” on Google will first bring up ads for the tax preparation companies, but are not the Free File versions. To find Intuit’s true Free File program, it takes a Google search of “TurboTax Freedom Edition.” Because of these deceptive practices, a class action lawsuit has been filed against both Intuit and H&R Block.

Given the failures of the program, it is no surprise that the program’s continuation has led to an immense backlash, one so large that the bill has stalled in the Senate. So why did the House of Representatives pass the legislation, and with such bipartisan support? Maybe it has something to do with the active lobbying and campaign donations that the tax preparation industry is a part of. The tax preparation lobby spent over $6.7 million in lobbying in 2018 alone. Furthermore, members of the two committees through which the bill passed through before making it to the House floor received many donations from the tax preparation lobby. The committee whose members received the most in contributions from both H&R block and Intuit in the 2018 election cycle was the Ways and Means committee. Members of the Ways and Means Committee received over $100 thousand dollars in contributions from the two companies’ combined. While Intuit did not contribute a large amount to members in the Financial Services Committee, H&R Block did, with them coming in second, and receiving over $60,000. It is important to note that these figures are from companies that only perform tax-preparation. Any financial firm that performs tax preparation would be negatively impacted by a public tax filing software, and many large diversified financial firms will regularly spend tens of millions of dollars on lobbying and donations in a single election cycle.

Given that the Republican Party has a more corporate-friendly agenda, it would be reasonable to assume that Republicans were the main beneficiaries of campaign donations. However, this is not the case. Democratic Ways and Means Committee members received $41,345 in total with the Republican members receiving $67,500. And when it comes to the over $60,000 donated to members of the Financial Services Committee, Democrats actually received more than Republicans, with a $35,565 to $27,500 split. Obviously, profit-maximizing firms are spending so much on lobby and campaign contributions because they seek a return on investment, which they almost certainly did with the Taxpayer First Act of 2019.

While the passage of the Taxpayer First Act is only a single piece of legislation that will not greatly impact the public in the grand scheme of things, it acts as a microcosm of the dysfunction with our political system. This bill is obviously detrimental to the average American, yet it was passed anyway after heavy political activity from corporate interests. It is quite difficult to view the massive spending by these corporate interests as anything other than a form of legalized bribery, and the public’s confidence in political institutions continues to erode. It also shows that while bipartisanship in Washington is alive and well, that is not positive in and of itself, because much of the time, the driving force behind the parties agreeing is based on the interests of their common donors and not on issues Americans of both parties agree on.