Blurring the lines
- By William Matthews
- Nov 12, 2000
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
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.
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,"
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
"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,
"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."