Hearing of the Transportation, Treasury and General Government Subcommittee of the Senate Appropriations Committee - FY2005 Budget

Federal News Service

HEADLINE: HEARING OF THE TRANSPORTATION, TREASURY AND GENERAL GOVERNMENT SUBCOMMITTEE OF THE SENATE APPROPRIATIONS COMMITTEE

SUBJECT: FISCAL YEAR 2005 BUDGET FOR THE TREASURY DEPARTMENT

CHAIRED BY: SENATOR RICHARD SHELBY (R-AL)

WITNESS:

JOHN SNOW, SECRETARY, DEPARTMENT OF THE TREASURY

LOCATION: 138 DIRKSEN SENATE OFFICE BUILDING, WASHINGTON, D.C.

BODY:
SEN. PATTY MURRAY (D-WA): Thank you, Mr. Chairman. I want to welcome Secretary Snow to our subcommittee. And this morning I want to focus on three issues: terrorist financing, outsourcing, and IRS debt collection.

Let me start with terrorist financing. Our government has certainly stepped up its efforts to stop the flow of money to terrorist organizations since September 11th. Unfortunately, that's not saying much, given the attitudes of some in our government before September 11. Richard Clarke, the former counterterrorism official, documented these attitudes in his recent book "Against all Enemies.

" Clark said, and I quote, "I wanted to raise the profile of our efforts to combat terrorist financing but found little interest." Clark said that the president's economic advisor, Larry Lindsey, quote, said, "I had long argued for weakening U.S.'s anti-money laundering laws." And Clark said that former Treasury Secretary Paul O'Neil, quote, was, "lukewarm at best towards the multilateral efforts to name and shame foreign laundering havens."

Since then we have taken some important steps, but I'm concerned that we may still be behind the curve in areas such as enforcement, nontraditional banking, staff and resources and communication. Our country and our international partners have put new laws on the books, but we must do a better job of enforcing them. We cannot allow companies like Riggs Bank to shelter their clients by ignoring critical federal requirements to report large and suspicious cash transactions, especially transactions involving foreign nationals and unknown charities. Our money laundering laws must be adhered to and enforced, and we must insist that Saudi Arabia and other nations follow through on their commitment to shut down suspect charities that are financing the recruiting of future terrorists and possibly terrorist attacks as well.

We also need to stay a step ahead of those who would harm us by looking beyond traditional banking. We can expect terrorists to act like drug smugglers. As we've successfully closed down their access to cash in one area, they will move to another and we've got to stay a step ahead. That means we must close down their operations of smuggling gold, cash and diamonds across borders. We also need to get our hands around the hawala money transfer system. We've got to be able to distinguish between the legitimate transaction of immigrants who are sending money to their families back home and dangerous transactions that lead cash into the hands of terrorists.

We also need to make sure that new government officials we put in place have the resources, staff and communication to do their jobs effectively. Recently we've expanded the portfolios of several federal agencies. We've appointed new undersecretaries, deputy undersecretaries and assistant secretaries. That's a fine start, but we need to make sure that these offices actually have the staff and resources to succeed, and we must avoid the communication problems that have plagued the CIA and the FBI. Clearly, we've got a lot of work to do to stop the flow of money to terrorist organizations and that's one of the topics I will explore with the secretary today.

I also want to talk about outsourcing. Secretary Snow has been outspoken in his belief that moving American jobs offshore serves to benefit the American economy in the long run. Mr. Chairman, I represent the most trade dependent state in the nation and I have a strong record of supporting international trade, but I don't believe that expanding trade requires hundreds of thousands of American families to lose their jobs, their healthcare and their dignity so that their employers can pursue cheaper labor elsewhere.

One recent survey suggests that we may be on the leading edge of an outsourcing tidal wave, especially in areas like information technology. According to a recent survey of 182 companies conducted by Diamond Cluster International, 86 percent planned to increase the use of offshore IT outsourcing firms in the next 12 months. That compares to just 32 percent of the companies that responded the same way just two years ago. Those who defend outsourcing claim that the companies that are shipping jobs overseas today will increase their employment here in the U.S down the road. That's little comfort to someone who's lost his job, particularly because his old job is not the one that will be coming back.

There is a real mismatch between the skills needed for the jobs that are moving overseas and the skills needed for the jobs that may be open in the future. For example, an increasing number of U.S. engineering jobs have been moved to India. Right now the unemployment rate for engineers in the United States is twice the national average. That is really hurting a lot of families. There are fields where we have shortages, like nursing, but I don't know how many engineers can go to school to become a nurse while they've still got to feed their families.

These mismatches are all around. A factory worker who's laid off from a manufacturing company cannot turn around tomorrow and take a job at a drug company that looks for pharmacological researchers. Simply put, the people who suffer from outsourcing today cannot move easily into available jobs and the skills they have today are not the ones that will be in demand tomorrow. Fortunately, we do know how to help people move from yesterday's jobs into the jobs that are open today and the jobs that will be open tomorrow. The answer is our nation's job training system. This is the time to invest in that system so it can help all the people who have lost their jobs through no fault of their own.

Unfortunately, the administration is moving in the wrong direction. In addition to serving as the ranking member on this subcommittee, I also serve as the ranking member of the Employment Subcommittee in the Senate. I've analyzed in detail President Bush's proposal to increase job training and here's the bottom line. His proposal does not add one dollar to our federal efforts to train our workforce, not one dollar.

In fact, the president's budget cuts $300 million from existing assistance for workforce training. Even worse, those new cuts for 2005 come on top of more than $500 million in job training and employment service reductions that have been recommended since President Bush took office. In my book, those who defend outsourcing should be the biggest advocates of a real increase in job training for American workers who end up on the losing end of the international trade. And I want to explore that later this morning with Secretary Snow as well.

Finally, Mr. Chairman, I want to discuss my concerns over the secretary's proposal to allow private contractors to collect unpaid tax debts owed to the IRS. This proposal is currently included in the FSEIT (ph) bill that will be debated again in the Senate floor in a few days.

We all know that the IRS has done a very poor job of collecting unpaid tax debts. In fact, to my shock, it has become apparent that the IRS has not even collected unpaid taxes from several individuals who've been convicted in court of tax evasion. The Treasury Department should request sufficient funds so that IRS agents can collect those unpaid debts, but instead, the department has decided to invite the private sector to do the job. For anyone familiar with the Treasury Department's record on using contractors, it raises serious red flags about the privacy of individual taxpayers. The department's abominable record on ensuring that contractors protect the privacy of our citizens is not speculation, it is fact.

A little more than a year ago, the Treasury inspector general for tax administration did an audit and observed that the IRS has no assurance that its contractors completed the required background investigations of their employees. Just last month, the Treasury IG completed another audit that made it clear that the IRS continues to do a very poor job of monitoring the overall trustworthiness of its private contractors. According to the inspector general, IRS contractors had, and I quote, "committed numerous security violations that placed IRS equipment and taxpayer data at risk." In some cases, contractors blatantly circumvented IRS policies and procedures, even when the IRS's security personnel identified inappropriate practices.

One disgruntled contractor employee planted a computer time bomb on an IRS system that would have destroyed sensitive taxpayer data. Another contractor connected an unsecured computer to the IRS network and cost the agency $1.5 million in downtime and cleanup costs to eliminate a virus introduced by that contractor. The Treasury Department has given all sorts of verbal guarantees that taxpayers will not have their privacy compromised when private contractors start collecting from the public. But given the IRS's abysmal record in monitoring its own contractors, I am deeply concerned that these private collection agents will not respect the privacy of taxpayers. I hope this subcommittee will insist on nothing less than the strictest privacy guarantees and assurances before we allow-the IRS allow private contractors into the federal debt collection business.

Thank you very much, Mr. Chairman.

BREAK IN TRANSCRIPT
SEN. PATTY MURRAY (D-WA): Thank you, Mr. Chairman.

Mr. Secretary, as I mentioned in my opening statement, a recent private sector survey revealed that 86 percent of the companies questioned expect to expand the use of offshore IT outsourcing over the next 12 months. When that same question was asked to companies just two years ago, the number was only 32 percent. My home state of Washington has an extraordinary number of IT specialists who are now suffering as a result of this downturn in the industry.

Is the Treasury department monitoring this situation in the potentially explosive growth of outsourcing in certain select industries?

MR. SNOW: Senator Murray, I have seen some studies on this and try and keep myself apprised to the extent I can in the area. Unfortunately, the data is not all that we'd like it to be on that score, and we get different analyses and different estimates. I think probably the Commerce Department and the Labor Department are in a better position to talk technically to what the data shows.

But what I've seen from the various surveys, Forrester Group I think is the one that is doing the study you're referring to, so far the effects have been relatively-relative to the total number of jobs that are being created in the United States economy and the displacement rates are fairly small.

SEN. MURRAY: Well, what other industries do you think besides IT might experience this outsourcing?

MR. SNOW: Well, I guess we've seen radiology outsourcing. I think Massachusetts General Hospital is getting x-rays read overseas. Medical health, healthcare service industries, I'm told.

SEN. MURRAY: But what does-telecommunications?

MR. SNOW: Telecommunications, yeah.

SEN. MURRAY: What is the Bush administration doing to try and stem the flood of jobs that our country is losing?

MR. SNOW: Well, I think the best thing we can do-and of course we don't want to see any jobs lost anywhere. The best thing we can do is to keep the American economy as vibrant and strong and creative as possible so that we're continuously creating as many new jobs and good new jobs, jobs that point to careers, as we possibly can.

SEN. MURRAY: Well, you know, it's fine for economists and policy makers to argue back and forth over whether our country gains the benefits from outsourcing, but one thing that really is forgotten in this debate a lot is the people and the families that have lost their jobs. And I recently read about a 40-year-old woman in Seattle whose name was Myra Bronstein, she worked at an IT job at a company called WatchMark Corporation.

She worked there for two years, and day she said that her entire department was informed that they would be laid off in a month, and worse, they were told they had to train their Indian replacements or lose their severance package. She is still without work after 10 months, and her unemployment benefits just ran out and she just-these are her words, let me read them to you.

She says, "My life has changed drastically over my 10 months of unemployment. I've cashed in my 401(k), can no longer afford health insurance and can just barely pay the rest of the bills. I've even resorted to selling a number of my things on eBay to get money for essentials. I think that my biggest struggles throughout this experience are the constant feelings of powerlessness and paralysis.

"I did everything I could to succeed, I got a good education, I paid off big student loans, I worked hard at my job, but now I realize that it doesn't matter what I do to make myself a marketable employee if there are no policies in this country to protect our jobs from being sent overseas to someone who will work for one-sixteenth of the price. I can't compete with that. You could say that I woke up from the American dream."

What do you say, Mr. Secretary, to someone like that?

MR. SNOW: Well, obviously, Senator, your heart goes out to anybody who finds themselves in those circumstances. Those are dreadful circumstances for anybody to find themselves in. Two things I think we can say, one is we live in the most dynamic economy in the world, we live in an economy that is continuously changing, an economy in which there is continual regeneration going on. Which means displacement is continuously occurring.

There are about 40 million new jobs created every year in the United States, and there are roughly 40 million people displaced from their old jobs. So we have this extraordinarily dynamic economy. What I think we need to do, is why those tax cuts were so important, is continuously focus on making sure aggregate demand is large enough to support employment for everybody.

SEN. MURRAY: But if you're an IT worker, you can't become a nurse tomorrow.

MR. SNOW: No, I understand that, Senator. And the second part of the answer is, we have to make sure, I think we have an obligation in an economy that's changing as fast as this one, because remember, a lot of people are getting displaced not because of contracting out or foreign competition, they're getting displaced because of domestic competition. We have to make sure that opportunities for skills development and retraining and education are widely available.

SEN. MURRAY: So you would say investing in those are critical?

MR. SNOW: Yes, I do. I think investing-making sure people have easy access to low cost ways to acquire the skills to give them the jobs of the future is an obligation that we must take on.

SEN. MURRAY: What about bridges like unemployment compensation for people like that?

MR. SNOW: Yes, absolutely there's a role for that.

SEN. MURRAY: Okay. Well, Mr. Secretary, one of the provisions that were included in last year's Appropriation Bill was the prohibition against using Fiscal Year 2004 funds to contract out any federal job overseas. Well, to my shock the president's budget specifically request that this provision be deleted from Fiscal Year 2005. Mr. Secretary, could you cite for me some instances at the Treasury Department where you might take work that is currently being conducted by federal employees and send that work overseas?

MR. SNOW: Senator, I'm not aware of any.

SEN. MURRAY: Then tell me why the president wants us to grant him authority to move federal jobs overseas?

MR. SNOW: Senator, I'm not familiar with the background to that provision. I'm sure somebody at OMB or DOD could talk to it better, I'm just not knowledgeable enough to offer you a thoughtful opinion on that.

SEN. MURRAY: But you have no jobs in your department that you --

MR. SNOW: Not that I'm aware of, and I'll check --

SEN. MURRAY: So you would not object to us putting that provision in the bill?

MR. SNOW: Well, there may be reasons beyond the Treasury Department, we're only a small part of this government, and there may be some compelling rationale in some other department for some access to that. But I'm not aware of any at Treasury.

SEN. MURRAY: You know, a lot of economists have gone back and forth over this issue about whether outsourcing American jobs is beneficial to the economy, but there is a different question that surrounds this issue that I want to take a second to discuss with you. And that's the question of whether it's ethical and patriotic to send these American jobs overseas.

You know, many of the companies that are sending these jobs overseas for the longest time benefited by being American companies, and they have benefited from being part of the most vibrant economy in the world. They've benefited from our substantial investments, by us as taxpayers and our national defense and our tax structure, in innovation and commitment of the American people.

We can disagree on the issue of whether it's good economics to ship the jobs overseas, but I still do want to ask you this today. Do you think these companies that have benefited from the American experience for so long and are now shipping American jobs overseas are operating in an ethical manner? Is there anything we or they owe these American workers?

MR. SNOW: Well, Senator, the management of America's companies have a fiduciary duty to their shareholders. And that fiduciary duty, which they must, under the law, take seriously and when they don't we get into things like the Enron scandals, they have a fiduciary duty to pursue the best interests of their owners. And that means staying competitive and producing good products and producing them at low cost.

So the first responsibility of management is in an ethical way to pursue the best interests of their shareholders.

SEN. MURRAY: Over the best interests of taxpayers that have invested in investments that make them profitable today?

MR. SNOW: Well, I'm not sure there's a conflict there, Senator. If American companies don't stay competitive, then they're going to have a hard time creating good American jobs and competing effectively, and of course a lot of competition comes from firms that are located outside the shores of the United States. If they can't stay competitive with those enterprises, they're going to cede market share to them, cede revenues to them, and ultimately America's ability to create good jobs here with high standard of living will be eroded.

SEN. MURRAY: Well, Mr. Chairman, I'm not sure I would agree but I know my time is up at this point, so I'll move on and wait till my second round.

BREAK IN TRANSCRIPT
SEN. MURRAY: (Laughs.) Thank you, Mr. Chairman.

Let's just not forget that there is another side to the EITC issue, which is many, many poor taxpayers who don't know they're eligible, who we are not giving their payments to and that is part of the error rate; that we don't want to lose them?

MR. SNOW: Senator, I agree with you. That's a part of the whole problem. We don't want to hurt anybody.

SEN. MURRAY: Mr. Secretary, as I talked about in my opening statement, IRS has proposed the use of private debt collectors to collect tax debts. And as I said, I am really uneasy about this proposal because of the abysmal record of the IRS in protecting the privacy of taxpayers. In fact, when the IRS tried the use of private collection agencies in a pilot a couple of years ago, it was just fraught with problems. Then in February of 2003 the I.G. noted the extraordinarily lax record of IRS in administering background checks for IRS contractors, including contractors that have access to sensitive tax data. And then just last month the I.G. found that contractors committed numerous security violations that placed IRS equipment and taxpayer data at risk.

In some cases, contractors blatantly circumvented IRS policies and procedures even when security personnel identified inappropriate practices. For example, one disgruntled contractor employee planted a computer time bomb on a computer system that would have destroyed sensitive taxpayer data, and another contractor employee connected an unsecured computer to the IRS computer system, costing $1.5 million in down time and cleanup costs.

Mr. Secretary, given the fact that some of these findings were published just last month, why should we believe that the IRS is in a position to protect taxpayer information and privacy when they hand over the responsibility to collect tax debts to private contractors?

MR. SNOW: Senator, I would agree with you that the prior experience with the private collection agencies did not go well. It was not a success. It wasn't as well planned, as well thought out, as well structured as it should have been. I think we've learned a lot of lessons from that prior experience that will be applied here if Congress authorizes IRS to go forward with the private collection agencies. We're acutely aware of the protection of the taxpayer rights. The private collection agencies would have no enforcement power. They would go through intensive training about their role, which is not enforcement but just collection. They would go through intensive training on their legal responsibilities to taxpayers, including protection of confidentiality of taxpayer information.

This is really an effort on the part of the IRS to free up a highly trained IRS auditors and examiners to do more complex work and use the collection agencies for what you might call the low hanging fruit. That is, calling people up, notifying them, reminding them that they've got an overdue tax bill, but not bringing any enforcement action of any kind. The thought here is that a lot of people, if they're notified that they have an overdue tax bill-when somebody calls them up and pays some attention to them, that they would-they are compliant and they would therefore be prepared to make their appropriate payments either immediately or with some installment plan.

SEN. MURRAY: Mr. Secretary, I want to see what specific steps have been taken and what specific steps will be taken to protect privacy and to protect individual taxpayer data before I think this committee should move forward in moving in some kind of direction like that. I think that's extremely critical.

MR. SNOW: Senator, I agree with you. I think it's absolutely critical that taxpayer rights be protected here. And our proposal would mandate that the IRS monitor the activities of these private collection agencies closely, monitor their performance and deal --

SEN. MURRAY: Monitoring is after the fact.

MR. SNOW: -- appropriately with-well, there's the prior training. There would be intensive training and there would be continuous monitoring, and then there would be penalties for those who hopefully --

SEN. MURRAY: Well, if somebody has already planted a computer time bomb, monitoring isn't going to do anything that would show you that it's happened?

MR. SNOW: Well, Senator, there is a big opportunity here to help collect some overdue moneys using these resources that won't cost the federal government anything. And we're very sensitive to the issues you're talking about and we'll go to great lengths to see that, as I say, the confidentiality of the information is protected and that taxpayer rights are fully protected.

SEN. MURRAY: Well, I will be following the situation very closely because I'm deeply concerned about that. But my time is limited and I do want to ask you about funneling cash to terrorist organizations, as I also mentioned in my opening statement. As you know, our government has linked some 23 charitable organizations with the al Qaeda network and it's been a longstanding practice for terrorist organizations around the globe to use these charitable-giving us an avenue for their resources. There appears to be some continuing disagreement between our government and the governments of the European Union as to which charities should be designated as being associated with these terrorist organizations. A number of international charities that are listed by the U.S. have not been listed by the European nations. Do you believe the nations of Europe attach a sufficient amount of importance and commitment to combat terrorist funding?

MR. SNOW: Senator, I think we've made a lot of progress, a lot of progress. Not enough. And I think there needs to be more focus on the issue you're talking about here. I don't buy the distinction that some countries make between funding for a charity that goes for charitable purposes and funding to a charity that ends up going for a terrorist purposes. Our policy is that if a charity is getting funding that goes for terrorist purposes, we name that-we designate that charity as we have done on a number of occasions. We are urging other countries who are part of this FATF, the Financial Action Task Force on terrorist finance to do the same. We've made progress some places, not total progress in others. SEN. MURRAY: Which ones have we made progress with and which ones do we need to --

MR. SNOW: Well, we've made-actually a lot of progress on the whole subject.

The last several months with Saudi Arabia we have named any number of al Haramain branch offices around the world, and I can give you a full listing of all the designations, but there are a number of designations of charities now that have occurred, but as I say, in Europe you mentioned, there is some reluctance to designate a charity in its totality. They'll-and money is money and money that goes into a charitable organization is fungible with money that is used for good purposes and terrorist purposes.

SEN. MURRAY: What about Indonesia and Pakistan --

MR. SNOW: Well, JI has been-we designated JI in I think it was last august, when I was in Indonesia actually, we designated JI. I'll get you a complete list of all these designations. But, more need to come, but it is interesting that Saudi Arabia has taken the steps they have taken --

SEN. MURRAY: Are you satisfied that they are actually enforcing the new restrictions that they've put in place?

MR. SNOW: I think they are, yes I do. I think they take this very seriously, and of course, al Haramain is to them what the United Way is to us, it's their major charity. So good important progress is being made, but I think the distinction that some countries make between the good functions of charities and the terrorist functions of charities is an artificial and false distinction.

SEN. MURRAY: Well, thank you, Mr. Secretary. And I know my time is limited, I need to go to another committee as well. I would like to submit my other questions for the record.