Blurring the lines

The very idea sent shudders through the fast-growing field of electronic

tax preparation earlier this year. A giant in the tax business was thinking

of entering the industry — the Internal Revenue Service. In the spring,

another enormous newcomer rattled e-commerce entrepreneurs. The U.S. Postal

Service launched its electronic billing and payment service, elbowing into

a fledgling but potentially lucrative industry.

Then, in August, the General Services Administration made its move,

disclosing detailed plans for the governmentwide Internet portal FirstGov.

The portal promised to make it easier for the public to access government

services. Its powerful search engine would be able to find all documents

that the federal government has posted online. To companies trying to profit

from putting access to government online — from giant America Online Inc.

to smaller, government-oriented dot-coms — it looked like unwelcome competition.

Federal agencies have been ordered by Congress and the Clinton administration

to conduct more of their transactions online, eliminate paperwork, cut costs,

trim staffs and be more businesslike. And many of them are trying to do

just that, only to find that they have strayed into territory aggressively

guarded by business.

The IRS proposal, for example, sparked furious denunciation from business

interests that pleaded for help from Congress. In October, the Computer

and Communications Industry Association, which represents tax software-maker

Intuit Inc. and dozens of other information technology companies, urged

lawmakers to impose a "governmentwide moratorium on activities that would

duplicate or compete with private-sector electronic commerce."

CCIA pointedly reminded the House Appropriations Committee's Treasury,

Postal Service and General Government Subcommittee that "no authorization

or appropriation exists for the Internal Revenue Service to proceed with

its plan to provide electronic tax-filing services in competition with private


Edward Black, chief of CCIA, said the IRS' plans to offer taxpayers

online tax-preparation services "must be halted immediately to prevent the

public sector from using tax revenue as venture capital to undermine existing

private companies that provide electronic financial services."

Outcry against the Postal Service's move into electronic bill paying

was slightly less strident but was ill-timed. It came months after the electronic

"eBillPay" service went online. And complaints about FirstGov arose in August

but were muted amid general confusion about the portal.

It is clear, however, that the private sector is increasingly unsettled

by the specter of competition arising in electronic government.

As Black told House members during the hearing, "Although the immediate

question is whether the IRS should get into the role of providing electronic

tax-preparation services to the consuming public, we believe the real public

policy issue at stake is much larger and more profound."

The issue is: In the New Economy, how far should e-government intrude

into the realm of e-business?

Public, Private Boundaries "Outdated'

For the IRS, preparing tax returns online seemed like the best way to

meet the ambitious requirements of the IRS Restructuring and Reform Act

of 1998. The act says that by 2007, at least 80 percent of all tax returns

must be filed electronically and that electronic filing must be available

at no cost to taxpayers.

Electronic tax returns promise enormous savings for the IRS. Processing

electronic returns is slightly cheaper than processing paper returns — $4.14

for electronic returns compared with $4.28 for those on paper. But as the

number of electronic tax returns rises, the cost of processing is expected

to drop. It could cost $2 or less to process each electronic return if the

80 percent goal is reached.

But the industry onslaught appears to have the IRS second-guessing its

goal. During the October hearing, IRS Commissioner Charles Rossotti assured

the subcommittee that the IRS is not actively planning to go into the electronic

tax- preparation business. "At this time, we have no plans beyond soliciting

input from the industry on this matter," he said.

Such battles between e-business and e-government are probably inevitable

as each sector seeks to claim its territory in the electronic future.

"There will be clashes," predicted Stephen Goldsmith, a senior IT adviser

to George W. Bush who became widely recognized as a pioneer in electronic

government when he was mayor of Indianapolis from 1992 to 1999. As federal

agencies move more information and services online, "vendors will get frustrated

about the fact that they can provide — in their view — a better solution

for less money," Goldsmith said.

And even when companies prove that they can provide services more efficiently,

agencies are sure to fight efforts to shift long-held operations to the

private sector, he said. In the scuffles, both sides may be missing the


"The idea that there's a boundary is really outdated," said Goldsmith.

"Almost by definition, what the Internet is doing is making boundaries permeable,"

whether the boundaries are "department to department or public to private.

"As a general principle, government agencies should always ask for

competitive private-sector proposals as part of their process" for initiating

new services or operations online, Goldsmith said. Agencies should pull

together the right combination of government and commercial capabilities

needed to provide online services, he said.

But getting agencies to that point is unlikely to be easy; there's no

road map.

Indeed, there is a "lack of clear theoretical guidance regarding the

separation between government and business in a digital economy," according

to Peter Orszag, a former special economic policy assistant to President


In a treatise on government and the digital economy, Orszag and two

colleagues propose 12 principles to guide government in providing digital

goods and services. Orszag collaborated with his brother, Jonathan Orszag,

a former assistant Commerce secretary, and Joseph Stiglitz, former chief

economist at the World Bank and former chairman of the president's Council

of Economic Advisers, to produce "The Role of Government in a Digital Age."

The trio contends that government should generally stay out of markets

in which private-sector firms are active. But from an agency's perspective,

it is not always clear what activities are off-limits in the digital economy,

Peter Orszag concedes. Agencies are under pressure to cut costs, increase

efficiency, reinvent themselves — to be more businesslike — so it's not

surprising if some are colliding with the private sector, he said.

Postal Service vs. Private Sector

The U.S. Postal Service "is the poster child" among government agencies

when it comes to competing inappropriately with the commercial sector, Orszag


In April, the Postal Service began offering eBillPay, its electronic

billing and payment service. Besides enabling customers to receive bills

and pay them via the Internet, eBillPay will allow customers to consolidate

bills, pay bills through deductions from their bank accounts, pay some bills

automatically and have eBillPay send checks drafted on their accounts to

vendors who do not accept electronic payments.

For the Postal Service, eBillPay offers an opportunity to earn back

some of the revenue being lost as more billings and payments are carried

out electronically. This year, the Postal Service estimates it will lose

$300 million from bills and payments that would have been mailed being delivered

electronically. The General Accounting Office says the shift away from paper

mail could eventually cost the Postal Service billions of dollars a year.

That's a problem for the Postal Service, which is required by law not to

operate at a loss.

The competition to provide electronic billing will only increase. It

costs 7 cents to process an electronic payment, compared with 35 cents for

a paper check. For that reason, there is plenty of competition in the electronic

billing and payment business, including major banks, brokerages and Internet

companies. But should the Postal Service be among them?

A longtime gauge for determining whether activities are appropriate

for government is to ask whether they are "inherently governmental" — that

is, whether they are so related to public interest that they should be carried

out only by federal employees. Tax collection, administration of justice

and fighting the nation's wars are among the functions generally agreed

to be inherently governmental.

When applied to the Postal Service debate, "the fundamental question

is whether electronic bill payment is a governmental service," Orszag said.

His answer is no. "The delivery of bills and payments electronically has

revealed itself to be a competitive market provided by private-sector firms."

To the Postal Service, however, offering electronic billing and payments

is simply the technological equivalent of what the agency has done for 220

years: provide a service that enables the private sector to conduct business,

said Postal Service spokeswoman Sue Brennan.

Moreover, Brennan contends that USPS brings to the service a commodity

that other electronic service providers cannot: trust. With a history of

protecting customers' privacy and a police force to investigate fraud and

other postal crimes, the Postal Service can inspire consumers' confidence

in electronic billing and paying where others cannot, she said.

And rather than competing with the private companies, Brennan argues

that eBillPay represents a partnership with the private sector. The Postal

Service has teamed with two companies, CheckFree Corp. and YourAccounts.

Com, to provide eBillPay.

Conflicting Mandates

Federal law is unclear about whether federal activities such as the

Postal Service's eBillPay venture too far into the commercial world.

Since 1955, federal agencies have operated under the Office of Management

and Budget's Circular A-76, which states that "the government should not

compete with its citizens."

But in recent years, A-76 revisions by the Clinton administration have

encouraged agencies to become more entrepreneurial, Brennan said. The National

Partnership for Reinventing Government has also urged government agencies

to work harder to be competitive with the private sector.

Similar pressure to improve performance comes from Congress through

laws such as the Government Management Reform Act and the Government Performance

and Results Act.

One law, the Postal Modernization Act, would plainly authorize activities

such as eBillPay under a clause permitting "market tests of experimental

competitive products." But the Postal Modernization Act is stalled in Congress.

Orszag remains convinced that the Postal Service has strayed too far

into the realm of commerce. "We might feel differently about the Postal

Service if it were providing universal service for electronic bill paying,

but it's not," he said. "You need online access to get to eBillPay — and

online access is far from universal."

Insisting that federal agencies avoid any activity that could compete

with e-business is bound to be counterproductive, contends Patrice McDermott,

an analyst for OMB Watch, a government watchdog organization.

"How far behind industry should government be required to stay?" she

asked. "There are all sorts of things agencies can be doing to customize

information and data" for the public.

The Census Bureau, for example, could extract a vast trove of useful

information from its massive data collection. Should the Census Bureau be

precluded from doing so because businesses also do that? "That's ridiculous,"

McDermott said.

As a general policy, as long as providing a customized service does

not require substantial extra work or expense, the agencies should be allowed

to do it, she said.

But there are some tasks better left to business, McDermott acknowledged.

"Collecting taxes and assisting people with filing their taxes is inherently

governmental," she said, "but finding loopholes in the tax law probably

is a role that should be left to the private sector."

More Opportunity Than Risk

As unclear as the boundary between e-government and e-business is, the

line will be even less clear in the future, predicted Ari Schwartz, a policy

analyst at the Center for Democracy and Technology.

Over the next two or three years, government agencies will begin providing

many more interactive services. The Internet will make it far easier for

the public to deal directly with individual agencies and groups of agencies,

which in some cases will "cut out the middleman" operating in the private

sector, Schwartz said. "There will be a rocky period" as agencies, the public

and the private sector adjust to the electronic environment, he said.

In some cases, that has already happened.

The Securities and Exchange Commission provoked an uproar several years

ago when it introduced EDGAR, its Electronic Data Gathering, Analysis and

Retrieval system. The system makes it possible for the public to quickly

find time-sensitive financial documents filed with the SEC.

Before EDGAR, SEC filings were public documents, but timely access was

available only to those who could make regular trips to SEC headquarters

in Washington, D.C. That enabled a number of companies to build businesses

out of gathering the information and selling it.

When the SEC announced that it was planning to put the information online,

those companies complained bitterly that they would be "materially adversely

affected." But the SEC pushed ahead, contending that its responsibility

was to get the information out as efficiently as possible and the Internet

was a new way to do so.

To Nick Carter, vice president of Boston-based Imagitas, the Electronic

Age represents opportunity, not peril, for adroit companies. Imagitas specializes

in building partnerships with government agencies to provide services to

the public.

"We're excited about government agencies taking electronic government

seriously," he said. Agencies should take advantage of any technological

change that comes along if it helps them better fulfill their missions,

he said.

"As a for-profit business, we see that there is great opportunity for

us" as government agencies shift to adapt to the digital economy, he said.

"We don't see it as a threat. We know they're going to need us."

Trying to maintain a sharp line between e-government and e-business

is an outmoded idea, Carter agreed. "In the Postal Service case, if they

had listened to all of the arguments about competing against the private

sector, they would still be delivering mail by horse."


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