How Government Creates Poverty

Government is much better at creating poverty than at curing it.

On April 3 the General Assembly voted to end the practice of suspending driving licenses for non-payment of fines or restitution or both and ordered Department of Motor Vehicles to restore driving privileges for hundreds of thousands of Virginians. If you need to do business at a DMV office in July, when all this happens, get there early. Restoring 600,000 licenses may take a while.

The General Assembly did nothing to eliminate the underlying debts that the various individuals cannot or will not pay (and often it is will not). Nobody really asked any questions about how high the fines have become, how many additional court and processing costs have been layered on to enrich government, and whether those should be rolled back.  Some of the legislators did bring that up in debate, but it wasn’t a focus.

As with so many things in this world, this is all about the money. Follow the money. How government creates poverty and profits off it may become a theme for future stories. This one is a good start, because nothing was fixed.

For several General Assembly sessions, I represented some of the law firms who collect these debts for Virginia’s court system as contractors working on a contingency fee basis.

I was initially approached by one firm to research a small issue. During the previous session of the Assembly, in a typical undercover budget move, language was added to put yet another cost on the backs of these debtors, a 17% surcharge. If the debt had been $300, it suddenly became $351; if $1,000 this added another $170. Why? To cover the cost of collection, of course! Why 17 percent? Because that was the contingency fee being charged to the courts by the state Department of Taxation.

My father, when he was a city manager, found a joke sign which he hung in his city hall office that announced a new 6% tax to cover the cost of collecting taxes. As I explored this question for that Hampton Roads lawyer five years ago, that sign was then hanging in my office and the parallel was clear.  Government was getting greedy.

The last step in the process for these debtors, if they ignore the court’s own collection efforts and if losing their license doesn’t bring them around, is assigning the case to somebody for collection. The state wanted the debtors themselves to cover the contingency fee paid to the collectors.

My client list grew to several firms when it turned out turf wars were erupting over that collection process and the related fees.  The private law firms were competing with the state agency that collected for most court systems, the Department of Taxation, and a growing number of local city and county treasurers who were doing the collections. When the local agencies took the contract and kicked out the private firm, the contingency fee demanded and paid on the collections routinely went up. Some localities saw a way to funnel state dollars to their local bank account by jacking up the fee.

Eventually the legislature stemmed the local greed parade. It happened with (you guessed it) budget language, boilerplate which is in the annual bill to this day.  It sought to force the localities to charge no more in fees than their actual costs of doing the work. That issue is not the point of this essay, but what I learned and observed while working on it, lessons I took away.

Nobody was interested in solving the problem by reducing the fines or taking off the extra charges, including that final 17% extraction. Nobody was interested in creating a process for negotiation and settlement, like the process that exists if you have a tax debt. Many of these debtors have a problem in more than one jurisdiction, but no jurisdiction was interested in surrendering control of their claim on that person’s finances to a streamlined central process.

The whole system cried out for an intelligent redesign, which is still needed. One recent reform imposed by the Supreme Court did make it far easier for debtors to get on a payment plan, something many local courts were refusing to do. That reform was never given time to work, however, before this recent decision by the General Assembly to restore the licenses without payments.

If you examine the most recent report of the State Compensation Board on the fines collection process, here, you won’t find much data about the debtors, their average amount in arrears, how far behind they are. Just how much in such “receivables” is owed to the state and locality, accumulated over years, is never included in the report.

In 1998 about 68 percent of the $281 million in fines and costs assessed by the courts were collected directly by them, leaving 32 percent for other collectors to try.  By 2018 the rate of immediate payment was down to 63% of $470 million assessed, leaving more than $170 million for others to chase and earn a contingency fee.

Government paying itself a contingency fee to collect a government debt – a fee higher than the private sector would charge – is a great way to create and preserve poverty.

Not one dollar of that liability has been set aside by the General Assembly’s actions. The liabilities will continue to pile up, with interest and with one less major collection tool available. The calculation has probably been made it is better to collect high dollars from those who can pay than to set lower fine and fee amounts. What approach would actually reduce the misbehavior being punished?  That doesn’t seem to be the goal at all.

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About Stephen D. Haner

Steve Haner is Senior Fellow for State and Local Tax Policy for the Thomas Jefferson Institute for Public Policy. He is a former reporter, lobbyist, state employee and political advisor, with an emphasis on tax and business issues. He may be reached at blackwalnut140@live.com.
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