TurboTax’s Trickery, Part II

Inside TurboTax’s 20-year fight to stop Americans from filing their taxes for free, with ProPublica reporter Justin Elliott — PLUS: Gbenga Ajilore on why we’re not prepared for the next recession. Subscribe to Off-Kilter on iTunes.

As of 2019, nearly 40% of U.S. taxpayers filed online and some 40 million of them did so with Intuit’s TurboTax, far more than with any other product — many drawn in by the promise of free filing. But the success of TurboTax rests on a shaky foundation, one that could collapse overnight if the U.S. government did what most wealthy countries did long ago and made tax filing simple and free for most citizens. As investigative reporting by ProPublica has revealed, for more than 20 years, Intuit has waged a sophisticated, sometimes covert war to prevent the government from doing just that — to protect its own bottom line. Rebecca spoke with ProPublica reporter Justin Elliott about his latest scoop on the company: “Inside TurboTax’s 20-year fight to stop Americans from filing their taxes for free.”

Later in the show… “Everyone is asking when the next recession will be coming. I believe that this is the wrong question to ask. The right question to ask is, ‘Are We Ready?’” Those were the closing words offered by Gbenga Ajilore, senior economist at the Center for American Progress, as part of Congressional testimony he offered at a major hearing last week before the House Budget Committee on preparing for the next recession. He’s one of many economists ringing the alarm bells for policymakers, warning that we’re not prepared for the next recession, whenever it hits. Rebecca sat down with him to unpack why that is, what’s at stake, and the significance of so-called “auto-stabilizers.”

This week’s guests:

• Justin Elliott, reporter at ProPublica
• Gbenga Ajilore, senior economist at the Center for American Progress

For more on this week’s topics:

• Read Justin Elliott’s latest scoop for ProPublica, ““Inside TurboTax’s 20-year fight to stop Americans from filing their taxes for free.”
• For more from Gbenga Ajilore on why we’re not prepared for the next recession — and the importance of shoring up automatic stabilizers like Unemployment Insurance and SNAP, check out his testimony from last week’s Budget Committee hearing, and his recent CAP explainer

This week’s transcript:

♪ I work and get paid like minimum wage

Sights to hit the class by the end of the day

Hot from downtown into the hood where I stay

The only place I can afford ’cause my block ain’t saved

Spend most of my time working, trying to bring in…. ♪

REBECCA VALLAS (HOST): Welcome to Off-Kilter, The show about poverty, inequality, and everything they intersect with, powered by the Center for American Progress Action Fund. I’m Rebecca Vallas. This week on Off-Kilter, a growing number of economists are ringing the alarm bells, warning policymakers that we’re not ready for the next recession, which could be just around the corner, and that low-income and marginalized communities will be the hardest hit as a consequence. I talk with Gbenga Ajilore, senior economist at the Center for American Progress, to unpack why that is, what’s at stake, and the significance of so-called automatic stabilizers, wonky as they may sound.

But first, if you’ve watched TV at well, pretty much any point in the past few years, you’ve probably seen commercials for TurboTax that sing out the words “Free, free, free, free, free.” As of 2019, nearly 40% of U.S. taxpayers filed online, and some 40 million of them did so with Intuit’s TurboTax, far more than with any other product, and many drawn in by the promise, like that, of free filing. But the success of TurboTax rests on a shaky foundation, one that could collapse overnight if the U.S. government did what most wealthy countries did long ago and made tax filing simple and free for most citizens. As investigative reporting by ProPublica has revealed, for more than 20 years Intuit, the maker of TurboTax, has waged a sophisticated, sometimes covert war to prevent the government from doing just that to protect its own bottom line. I spoke with ProPublica reporter Justin Elliott about his latest scoop on the company. Let’s take a listen.

Justin, thanks so much for taking the time to come back on the show.

JUSTIN ELLIOTT: Yeah. Thank you.

VALLAS: So, just before we get into what your piece finds — and there’s no shortage of drama and intrigue here — help us understand the kind of basic product here that I was talking about, the “free, free, free, free, free” that you see in these commercials. It’s a product called Free File.

ELLIOTT: Yeah, right. Well, actually, part of the confusion here is that we live in a world where there’s multiple definitions of the word “free.” So, the Free File program is a about 15- or 20-year-old public/private partnership between the IRS and the tax prep industry, of which Intuit is by far the dominant player. And basically, it’s a deal that says two things. The first thing is the IRS is never going to establish their own, essentially, version of TurboTax that would compete with the private industry. And in exchange, the industry says we’re going to give free versions of our software to sort of lower- and middle-income Americans. So, that’s the Free File program.

The confusion starts because the advertising that you’re referring to that everyone’s seen is actually not for the Free File program, but it’s for the TurboTax Free Edition in which many people actually have to end up paying. So, that’s actually one of the games that’s being played here.

VALLAS: So, and your piece, I want to actually read just a paragraph here that I think sums up kind of the gist of it. But then I really want to get into some of the gory details here with you, because there’s a lot in here. You write, “From the beginning, Intuit” — and that’s the maker of TurboTax — “recognized that its success depended on two parallel missions: stoking innovation in Silicon Valley while stifling it in Washington. Indeed, employees ruefully joke that the company’s motto should actually be “compromise without integrity.” Wow. And so, at the heart of their strategy, as you report in this piece, is to, you call it an anti-encroachment strategy. And that’s really what the company actually calls it, encroachment being the company’s catch-all term for any government initiative to make filing taxes easier. And the centerpiece of this strategy really is, as you were describing, their competitor to Free File. And it all started 17 years ago when the company was facing a crisis for its bottom line. Take us back 17 years ago to the beginning.

ELLIOTT: Sure. So, sort of stepping back for a second, when you think about paying taxes, if you have a sort of normal salaried job, right, taxes get withheld from every paycheck. And so, at the end of the year, the IRS actually already has the data of exactly how much money you’ve made and how much you paid. That’s why if you underpay, you’re going to get a letter from the IRS saying, “Give us the rest of the money.” So, what has happened in most other developed countries, and some developing countries, is that the tax agency uses the data that they already have to pre-populate your tax form. So, this can take a number of forms. But in some places, it’s literally like you get the tax form. It’s all pre-filled out because the tax agency has the data. And you essentially just click, “OK.” There’s no money to a private company. You don’t have to get all these forms together. So, it’s quick and free, basically.

So, going to the early 2000s, actually, the George W. Bush administration was thinking about ways to promote what at the time was called the E-government. And moving the IRS to a system of pre-populating returns or at least having an easier portal where people could file their taxes was at the top of the list of this is something that we should clearly do. You know, the proliferation of computers is making this kind of a no-brainer. And so, the Bush White House actually proposed this in the first year of the administration, and that’s when the Intuit lobbying machine kicked into gear. And they recognized this as a threat to TurboTax. Essentially, if the government makes tax filing free and easy, there’s going to be no reason for many people, perhaps most people, to buy this private software. So, that’s sort of where it all began.

VALLAS: Which makes common sense, right? Why would you pay for some kind of a service if the government were providing it for free and it was easy to navigate, as you were describing, as it happens in most other wealthy countries. So, tell a little bit of the story then of how they managed to beat back that threat posed by the George W. Bush administration and its so-called E-government push.

ELLIOTT: Right. So, basically, the industry came up with sort of a counteroffer. And this is what became the Free File program. And the basic idea was the industry said to the government, don’t worry about this. You have too much on your plate. Instead, just enter into this deal with us where again, you will promise not to create a system of your own. And in exchange, we will provide a free version of our product, to, at the beginning, I think it was 60 percent of Americans. Now it didn’t mean that 60 percent of Americans were actually going to use this free product. It meant that there was going to be a free product available to them if they knew about it and found it. And so, they also got friendly members of Congress, actually, Duke Cunningham, the San Diego Congressman who later did time in prison for corruption, happens to have been the hometown Congressman of TurboTax, and was one of the people leading the charge on this. And basically, he and some other members sent a letter to the Bush administration saying, essentially, don’t you dare think about doing this IRS E-government push. And so, they lobbied Congress, and they basically convinced the administration to drop this plan and instead embrace this public/private partnership that wouldn’t cost the government any money.

So, this program was established in 2002, and even though it was available to 60 percent of American tax filers, nowhere near that many actually ever used it. I mean, I believe it peaked at around four or five million people.

VALLAS: So, basically, this was the compromise, right, that they would expand their free tax prep services from basically what had been a really, really minor product before that was available only to basically poor people filing their taxes to a much larger swath of the population in terms of just who is actually eligible, as you said. But in exchange, the IRS signed a contract saying very clearly that it will not compete in providing free online tax return prep and filing services to taxpayers. So, here they had the government promising not to be a competitor. Now, people might be listening to this and saying, OK, but how are they going to make a ton of money off of some free product that’s now available to 60 percent of the population? And you actually describe in your piece that free wasn’t as unprofitable as it sounded.

ELLIOTT: Right. So, in the early years of this program, even if you were one of the small minority of Americans that managed to find it and you were actually using this Free File program, what you would realize would be that you would get a free federal return, but then your state return, they would charge you for. So, they were actually still making money off that. Other people, they were selling refund advance loans to. So, essentially, it’s like a line of credit against your expected tax refund. Other side products like so-called audit defense. So, there’s a whole sort of suite of products that were being sold to people, even those who actually were getting a free federal return. That was the sort of very early years of the program.

And then basically what happened over the years is that consumer advocates would criticize these sort of side deals, and the program had tighter rules imposed on it. And over time, it became very hard for the industry to make money off of people who were using Free File. And sort of fast forwarding to the present, it finally culminated in the industry actually taking active steps to hide this option from people this past year, which we wrote about, including actually suppressing it from search engines. So, essentially, the big picture arc was they were trying to make money off it in the early years. That became harder, and then they essentially suppressed it.

VALLAS: And I want to get back to the present-day stuff, because there’s a lot there, too, and a lot that you report on in this piece that also together, with that previous reporting, paints just a really incredibly nefarious picture of this company. But back to that kind of 2002 deal, right? Everything looked gravy at the time, but then, you report, Intuit began to lose control of this Free File creation that it had established through this kind of smart lobbying campaign. And that was because a competitor called TaxAct decided sort of not to play ball with the rest of the filing companies like Intuit and H&R Block and others. It actually decided to try to offer really free services.

ELLIOTT: Right. Exactly. So, basically, what happened was even back then, Intuit was the dominant market player. Had over half the market share in online tax prep. And this upstart company TaxAct looked at this government public/private partnership and essentially saw a marketing opportunity. And they decided to get rid of all of the income eligibility requirements and just say, look, if you use TaxAct, it’s going to be free for anyone, regardless of your income. And then they would still try to sell you on the side products, but more people could get the free federal return. And so, this gambit actually worked, and TaxAct started to gain market share. And Intuit essentially sort of freaked out because the status quo was working for them. So, they actually went to the IRS and Congress and made the case that this program was essentially a threat to their well, it was a threat to their profits and their long-term stability, and that the IRS needed to essentially impose new restrictions on the program to make sure too many people weren’t using it.

And so, when we were reading through these documents that we obtained that were sort of outlining this whole episode, it’s kind of incredible because you actually have IRS officials working with the industry to limit how many people are going to be able to file their taxes for free.

VALLAS: And you, I want to quote you here because you have some pretty damning words in here about some of the findings that you guys made in this investigative reporting regarding the IRS. You write, “The IRS is seemingly the biggest threat to Intuit and other commercial tax prep businesses, but it is more frequently acted as the industry’s ally.” They actually declined to comment for the article. And this point in the story was one of these moments where the IRS effectively swooped in to help Intuit and to beat back its competition.

ELLIOTT: Right. SO, I mean, the IRS, actually in the mid-2000s, imposed new restrictions on the program that said what TaxAct was doing, which was getting rid of the eligibility requirements and just opening it up to everyone, was no longer allowed. So, they actually imposed restrictions saying, you can’t do that. You can’t offer it free to everyone. And you have to have, you know, there has to be eligibility requirements by income. And then it sort of got more complicated from there.

Another thing we found is that there’s been multiple high-level IRS officials who have been in charge of regulating this program or negotiating with industry, who have left the agency and now work at Intuit. Actually, Intuit’s chief tax officer is the guy who used to oversee this program for the IRS over several years.

VALLAS: And so, here you actually had the IRS stepping in, effectively doing for Intuit what the company wasn’t able to do on its own. And so, the IRS agreed: Free File needed to be reined in, and a deal was struck. And only taxpayers who were under $50,000 a year at the time in income would now be eligible for the program. So, Intuit got exactly what it wanted.

ELLIOTT: That’s right. And this also actually at the time, interestingly, raised some antitrust concerns, because when you look at this, you see, OK, you have Intuit and H&R Block and these other tax prep companies who it seems like from the outside they’re getting together to try to, in legal terms, sort of restrain trade, essentially say, you can’t have a lower-priced product, or you can’t have the free product available to more people. And that seems anti-competitive on its face. But it turns out they actually, the IRS did actually get an opinion from the Justice Department Antitrust Division about this. And the letter, which we published, from the Antitrust Division said essentially, yes, it would be illegal for the companies to get together and do this amongst themselves. But if the IRS imposes this regulation, if it’s the government imposing this restriction, then it’s OK because it looks more like a regulation. So, the company effectively convinced the IRS to restrain trade on its behalf.

VALLAS: Which is just truly amazing when you think about it in those terms.

I want to back up for a second as you’re telling the story and also kind of paint a little bit of a picture of some of the cast of characters here. Because one of the more colorful parts of your investigative reporting here actually is the people behind the scenes who were carrying out this successful lobbying campaign. One of the people that you sort of profile throughout the piece, one of these colorful characters, is Brad Smith, former CEO of the company who took over in in 2008 and who previously had actually been one of its executive leadership during the days that you’re describing. And the other is one of the company’s chief lobbyists, a guy named Bernie McKay, who, somewhat colorfully, you write when he was asked which Star Wars character he is, described himself as Darth Vader. Tell us a little bit about these two guys and their roles in all of this.

ELLIOTT: Sure. So, I mean one of the interesting things about Intuit is that this is a Silicon Valley company. Actually, its headquarters is in Mountain View right next door to Google. It’s kind of Silicon Valley 1.0. I mean it was founded in the 1980s long before the Giants like Google and Facebook that we talk about today. But it’s actually had a lot of staying power. And it’s been, it’s made a truly incredible amount of money. So, we found that they actually have kind of a sunny reputation in Silicon Valley. They talk, you go to their website, they talk a lot about their values. The motto is “Integrity without compromise.” And they talk about customer obsession and to quote-unquote, “Deliver awesome.”

And so, Brad Smith, the longtime CEO, was sort of the avatar of this. He’s kind of like the, some of the people that worked at Intuit I talked to described him as kind of like a cool dad who just happened to run the company. And so, he was a big fan of Kiss, and he would do like the Kiss rock on hand sign at company events and all this kind of thing. So, he was almost kind of like a spiritual leader type. So, the company, even to their own employees, they don’t like to talk about the lobbying they do.

But we obtained a bunch of documents from inside the company, including a presentation that was made to the Board several years ago that show that they have an intense focus on stopping any effort by the government or any move by the government to move in the direction of the IRS itself making tax filing easier for people. They just don’t want the IRS to get anywhere close to sort of making the tax filing system easier. So, there’s a real contrast between the kind of public face that they put out and how they operate, at least in Washington behind the scenes.

And as you mentioned, there’s this other guy, Bernie McKay who’s their longtime lobbyist. He’s a Democrat, worked in the Carter administration back in the ’70s, and then went on to AT&T. And he was really feared at the IRS and at tax agencies in states around the country as somebody who would come in, bang on the table, threaten people, we were told. And, he was always about, again, stopping any move by either the federal or state governments to make tax filing easier on their own.

VALLAS: So, back to the story as you were telling it, and kind of taking us through the years, we’ve got Intuit trying to keep up with TaxAct and trying to sort of deal with the fact that TaxAct’s play had really sort of forever transformed the industry, as you put it. And so, we’ve got TurboTax launching this other product, Free Edition, which you described before is really confusing because now we’ve got all these different things with “free” in the name. And it’s hard to know which things are which and which things are actually free. And I love how you put it, right, that it’s like “free” has a sort of a flexible definition throughout this whole story. So, as you were describing, we’ve got Intuit basically pouring a ton of resources into this free edition. And ultimately, that product actually became the major driver of TurboTax’s growth, which put them in the position of trying to figure out, as you quote an internal company document putting it, how do we monetize free?

ELLIOTT: Right. Right. I mean there’s a sort of paradox. Yeah, I mean even just the phrase “monetize free,” I mean it’s sort of a strange concept. But right. As you say, we’ve been reporting on this for months, and it’s still sometimes confusing to try to understand how the word “free” is being used in different contexts. But let me attempt to explain it. So, again, we have this public/private partnership called the Free File program that’s chugging along. Not very many people are using it. It’s actually declining over the years. In the past decade, it’s been going down.

And then meanwhile, TurboTax launches this entirely separate thing called Free Edition. And what that is, is essentially something they advertise. If you click on it or you see the ad and you put it into Google and you get to TurboTax Free Edition, and you start filing your taxes. You have all your forms together. You’re putting in your income and everything. And then halfway or three quarters of the way through the process, depending on what tax forms you have, a screen might pop up that says, oh, actually, you don’t qualify for Free Edition because you’re itemizing your deductions, or you have student loan interest or a whole range of scenarios, the screen will pop up saying, actually, if you want to finish, pay us $75 or $150, depending on what your forms are.

And so, a key insight that the company made was that people hate filing their taxes so much that once they’re halfway through the process, even if they thought it was going to be free at the beginning, if they get to this point where the company says, actually, you have to pay if you want to continue, and if you don’t, good luck starting over again, people will usually just pay. So, this became a sort of core of their entire business, and that’s why there are now these ads, as you mentioned, where they’re just saying the word “free” over and over again. So, essentially, when you click on the TurboTax Free Edition, some people are going to end up not paying, but many people are going to ultimately be charged. And that’s what the business is now based on. And this is, again, separate from the IRS program, which has been increasingly sort of suppressed and shunted aside.

ELLIOTT: So, people might be listening and going like, well, wait a second. If someone really doesn’t want to pay to file their taxes, they’re just not going to pay. They’re going to start over. They’re going to really find a product that’s actually going to allow them to do it for free. But part of what your reporting really digs into and makes incredibly concrete through a lot of the conversations that you had with folks at the company is that they engage in something called “dark patterns” to try to get people to do things that they don’t actually mean to do. And there’s all kinds of research, user research, that goes into figuring out what kinds of dark patterns might be successful and effective. Talk a little bit about the dark patterns part of this.

ELLIOTT: Sure. Yeah. So, one of the really interesting things in talking to people that’ve worked at Intuit is that there actually is real innovation going on at this company. But it’s not necessarily about making the tax filing process easier. Because when you think about that as a programing problem, I mean, it’s not necessarily easy, but you basically have a tax form, and it’s essentially a straightforward calculation. And they’re trying to kind of turn that into a easy question and answer format. And there’s many products that do this. It’s not just TurboTax. But the genius of the company, at least from the perspective of the shareholders, is that they have applied data science methods, rigorous testing to the design of the website. So, everything down to the color of the buttons, to the text that you’re seeing, to the animations, all of it has been extensively and quite rigorously tested to maximize their revenues.

So, one example of this is when you go to the TurboTax homepage, you get a number of options, and one of them is this Free Edition that may or may not actually be free. But then there’s also the Deluxe Edition, which costs something like 100 bucks. And there’s a phrase next to the Deluxe Edition that says, “Maximize your deduction. If you want to maximize your deductions, click this,”

VALLAS: Which sounds great, right? Who doesn’t want to maximize their deductions?

ELLIOTT: Right. Sounds great. And I was told by people who had worked at Intuit that those three words, “maximize your deductions,” were sort a legend at the company for testing really well and getting people to start in the Deluxe Edition/ even if they really, truly were eligible to file for free, once they start in the Deluxe Edition, the software is never going to tell you that you can, in fact, pay $0 instead of $100. And the reason that we would call that a dark pattern, why it’s deceptive is that for most people, especially if you’re not itemizing your deductions, any version of the software is going to maximize your deductions, right? I mean if you have the standard deduction, it doesn’t matter what you use. Your deduction’s going to be the same. It’s going to be the standard.

So, it’s misleading, arguably, to say that one version is going to maximize your deductions because in fact, they all are. But the point is to get people to start from the paid version. That’s just one example. There’s dozens of examples like this. And they have huge teams of well-paid data scientists and designers and programmers who are every year working on optimizing for their revenue.

VALLAS: Right. One of the other ones that really jumped out to me, along with the “maximize your deductions” garbage is the use of animation in a way that actually has nothing to do with the processing that’s happening. There’s no delay that’s necessary. But that based on user research, the designers at Intuit realized that adding delays through kind of cartoonish animation that people are forced to watch while they think something is happening could actually reinforce, and I’m quoting here, “Fear, Uncertainty, And Doubt.” And that’s capital FUND, which is sometimes actually referred to as FUD, that acronym, all specifically again, to further reinforce people’s anxiety, which will hopefully, their research tells them, make it less likely that people are going to start over if they realize that they have to pay.

ELLIOTT: Right, exactly. So, the sort of paradoxical value proposition of the company is on the one hand, they want to keep tax filing sort of scary and anxiety-inducing for people while at the same time saying sort of, don’t worry. We’re the tech whizzes who are here to make it easy, right? So, they want to kind of do both those things at the same time. One of the things that they’ve done is, as you mentioned, added these animations. So, if the listeners have used TurboTax, you’ll probably remember this. In one case, toward the end of the filing process, there’s like a five or maybe six or seven second animation that plays saying, well, we’re going to take a second here to comb through your returns and make sure everything looks good. And there’s a little animation like a piece of paper, and there’s lines going across it as if it’s kind of being checked closely and the I’s are being dotted; the T’s are being crossed.

So, I talked to people at Intuit. They said the remarkable thing about that is that that animation literally added a delay to the software. There’s nothing going on, on the back end in those seven seconds. The entire purpose of that is to reinforce this idea that taxes are really complicated, and this software is helping you and making sure everything’s good, essentially. And the company actually acknowledged this to me. They said that they claimed that they were trying to offset feelings of stress and anxiety by using these animations. So, you can judge for yourself.

VALLAS: So, now here where the launch of Free Edition in 2007. This kicks off a period of massive growth for the company: exactly what they had wanted to happen. But now, fast forward to 2008. We’ve got the incoming Obama administration and yet another set of threats to the company’s bottom line on the horizon. So, yet again, we have Bernie McKay riding to the rescue to deal with it. What happened in 2008?

ELLIOTT: Right. So, Obama — before he was president — when he was running for president, actually, again, proposed, like the Bush administration before him, that the IRS move to a system where at least for tens of millions of people, they would get these pre-populated forms, and they would basically just be able to click “OK” and be done with it. No private intermediary needed. So, Intuit, again, was terrified of this prospect, and they basically use sort of every tool in the kind of Washington influence tool book. They got members of Congress, both Republicans and Democrats, especially Democrats from Silicon Valley, to introduce legislation that would bar the IRS from spending any money on making its own system. There was actually language actually made it into appropriations bills that were in law saying with, you know, one sentence saying the IRS can’t use any of this money to make its own tax filing system. They got other legislation introduced that would’ve made this Free File program permanent. And again, the reason the industry wants that is because the program, the deal that governs the program, says the IRS cannot make its own system.

And then they also, we got documents showing the company engaged in kind of classic Astroturf advocacy where they distributed money to think tanks and advocacy groups who then wrote letters to Congress reflecting the company’s policy position. They actually, especially in the Obama era, focused on minority groups. So, they got the National Black Chamber of Commerce, the Latino Coalition, and others to mobilize, tot support Intuit’s policy positions. Some of those groups have gotten money from Intuit. So, you know, a really intense lobbying push. And despite the fact that Obama as a candidate talked about doing this, they never did it.

VALLAS: So, just truly extraordinary and really nefarious measures yet again, right? Kind of Astroturfing coalition building that was all for show, trying to protect their bottom line once again. And as you said, they were successful once again under Bernie McKay’s sort of strategery and leadership. So, now fast forward to — and there’s so much in here, but I really don’t want to kind of give short shrift to some of these incredible findings — so fast forward now to 2018. And so, this, again, created a real moment of panic for the company. And it was a little bit of a different backdrop this time. It wasn’t the government necessarily proposing to step in and take over free filing in a competitive way. This time it was scrutiny that it was actually receiving finally from inside the IRS, who had been its longtime friend and ally in all the ways you’ve been describing. And so, the company started to freak out.

ELLIOTT: Right. So, it turns out the IRS has this sort of independent expert body called the IRS Advisory Council. And that Council was asked in the beginning of 2018 to take a look at the Free File program. Again, use had been sort of steadily declining. It was still only a few percentage of the population that was using this, even though it was theoretically available to 70 percent of all taxpayers. It had never gone anywhere close to that amount of use. And so, this expert body starts looking at the program. And Intuit and the industry gets wind that this is going to be a highly critical report that’s going to come out at the end of 2018, which, ultimately it was.

So, we got some emails from a public records request to the IRS showing that just a few weeks before this harshly critical report was going to be released publicly, the industry and its lawyers went to the IRS and said, we urgently need you to resign the Free File deal and extend it for another year. And here are some sort of modest reforms that we’re going to put in it. And the IRS just did this. They signed this deal extending it, essentially preempting this very critical report by just a couple of weeks. And so, this report comes out, and the IRS had already resigned the deal that this expert report was asking the IRS to renegotiate. But it was sort of too late. The industry had sort of won again.

VALLAS: And two weeks later, the Advisory Council report comes out. I mean, literally weeks later: that’s how much they got ahead of it by. And the indictment of the program and of the IRS’s role was damning. It said, “The IRS’s deficient oversight and performance standards for the Free File program put vulnerable taxpayers at risk.” But they had yet again sort of squeaked by, and by just a matter of a couple of weeks. So, that takes us almost to present day, present day being a lot that has actually happened in this calendar year, which you have also reported on and was the subject of what you and I talked about the last time you were on this show, when a bill called the Taxpayer First Act was heading towards what looked like it was going to be a unanimous approval in Congress. Talk a little bit about that threat, and catch us up to where we are now.

ELLIOTT: Sure. So, the sort of short version of what happened is the industry for years had been trying to get the Free File program put into law. So, up till now, it’s just it’s been essentially a contract that the IRS has negotiated with them every few years. And Intuit has wanted to get that actually into law. And so, this bill called the Taxpayer First Act included a provision that would do exactly that. We started writing about it. It was during tax season this past March and April, and there was a huge public outcry in response to our stories. And ultimately, Democrats in Congress stripped this Free File provision that would make the program permanent out of the bill. And again, the reason the industry would want that is because the program explicitly says the IRS cannot make its own system. And so, that would’ve been in law. So, this gets stripped out of the bill. We then did some more reporting, including on the dark patterns issues that we’ve discussed. And Intuit was sued by the L.A. City Attorney by a bunch of private plaintiffs in California. New York State regulators have subpoenaed them. And there’s been a whole series of investigations have started, many of which are still going.

And the IRS, meanwhile, commissioned a review of the program. The agency’s auditor is currently looking at it. And we still don’t know what, if anything, the IRS is going to do to change the program. And tax filing season for next year starts essentially in January or early February. So, it’s all actually very much up in the air right now.

VALLAS: So, where do things go from here?

ELLIOTT: Yeah. So, I mean I think there’s a number of things that can happen. So, one is that the IRS could sort of just keep the status quo, and then things would keep chugging along essentially as they are now. Basically, very few people would be filing for free, and most people would be paying Intuit or another company to file their taxes. Another thing that could happen is that the IRS could decide that it really wants to get tough about negotiating this deal. And the IRS is giving the industry something of value, which is this promise, essentially a sort of non- compete. They’re saying, we’re not going to get involved this business. So, in exchange, the IRS could push the industry to really offer a better free option. They could advertise the program, the truly free program. They could make it simpler. The IRS could negotiate that without any kind of act of Congress.

Now, if you start thinking about what Congress could do, there’s legislation that has been sponsored by Elizabeth Warren that’s existed for a number of years that would direct the IRS to start moving towards creating its own system of pre-filled returns for many taxpayers, which would again take private history out of it, take the fees out of it. And there are actually things that the IRS or Congress could direct short of that. I mean one thing the IRS could do is literally just contract with one of these companies, Intuit or one of the others, to make essentially kind of like a public option. And if people didn’t want the IRS to actually have to run this program on its own, they could just contract it out. It turns out the U.S. military actually already does that. If you’re in the military, there’s a contract with one of the companies that you could just get a free version. And that would end up almost certainly being much, much cheaper for Americans.

So, there’s a whole range of things that could happen, but the clock is sort of ticking because, again, tax filing season, especially for lower-income people who want to get their refund quickly, that usually happens in the end of January, beginning in February. So, we’re still writing about this, and we’re very curious to see what, if anything, happens.

VALLAS: And in the last minute or so that I have with you, your previous reporting, as you were describing, had a massive impact in that it actually may’ve changed the course of history by halting the Taxpayer First Act and really ringing the alarm bells for policymakers and legislators who didn’t appear to be aware or weren’t kind of minding the store what it was going to mean, its Orwellian name aside. What kind of reaction are you getting to this latest reporting? The piece is called Inside TurboTax’s 20-year fight to stop Americans from filing their taxes for free.

ELLIOTT: Yeah, I mean, well, we were wondering whether people would have any appetite to read about tax filing in October instead of March or April. And it turns out, somewhat to our surprise that they do. The story’s been read by a lot of people. I know that people on the Hill and these various investigators are reading the stories. So, we’ve been happy with how much people care about the topic. And so, we have more coming, so.

VALLAS: And do you anticipate any kind of response or potential consequences from or for the IRS?

ELLIOTT: I honestly don’t know. It’s very, very hard to predict the future on that. So, I can’t speculate.

VALLAS: I’ve been speaking with Justin Elliott. He’s a ProPublica reporter covering politics and government accountability. He’s been reporting pretty much all year on tax filing scams like the one you’ve been hearing about today. His latest piece is called Inside TurboTax’s 20-year fight to stop Americans from filing their taxes for free. And we’ve got a link to it on our nerdy syllabus page, as you expected we would. Justin, thanks so much for taking the time and for this incredible reporting. I look forward to seeing where it goes from here.

ELLIOTT: Thank you.

VALLAS: Don’t go away. More Off-Kilter after the break, I’m Rebecca Vallas.

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You’re listening to Off-Kilter. I’m Rebecca Vallas. “Everyone is asking when the next recession will be coming. I believe that this is the wrong question to ask. The right question to ask is, are we ready?” Those were the closing words offered by Gbenga Ajilore, senior economist at the Center for American Progress as part of congressional testimony he offered at a major hearing last week before the House Budget Committee on preparing for the next recession. He’s one of many economists ringing the alarm bells for policymakers, warning that we’re not prepared for the next recession whenever it hits. So, I sat down with him to unpack why that is, what’s at stake, and the significance of so-called auto stabilizers.

Gbenga, thanks so much for taking the time to come back on the show.

GBENGA AJILORE: Thank you for having me.

VALLAS: So, we’re going to get into the next recession, and how do we know if it’s coming, and are we ready and all of that stuff in just a minute. But one of the things that you’ve pointed out and really been kind of ringing the alarm bells on for quite some time is that even though we’ve been in a place of economic growth technically speaking since 2009, there’s actually a significant swath of the population who are still feeling the effects of the Great Recession. You call that a permanent recession. Who are those folks, and what do you mean by that?

AJILORE: So, I think we could think about it in two aspects. One, there’s certain areas of the country and certain individuals who are still suffering from unemployment and underemployment. So, a lot of rural communities have not recovered from the Great Recession. The second aspect are people who have technically recovered. They have a job. They’re getting earnings. But the severity of the Great Recession was so much that it leaves a permanent scar on them, and so they’re concerned about their savings behavior. So, that’s why a lot of people talk about, oh, the millennials, they don’t buy a home. And it’s like, well, they suffered through such an extreme downturn that it’s concerning for them, and they’ve built up a lot of debt.

And even then, you look at some of just the numbers, there was a recent study by a census economist who showed that millennials have suffered a permanent loss of 13 percent of their earnings. And even the Gen X and Baby Boomers have lost almost up to 10 percent of their earnings that they will never recover from. So, even though the Great Recession is quote-unquote “over,” a lot of people are still suffering. Even those who’ve done well are still suffering from the effects.

VALLAS: Obviously, that paints a scary picture when we think about the long-lasting consequences of a recession, of the magnitude of the one that we suffered in the last decade. But before we get into the next recession, is there anything else that people should be taking away from that reminder that we have a lot of folks who are still feeling those effects?

AJILORE: Well, we just have to understand what people still need from the economy, wat they need from government. That we still should have policy, supportive policies. You think about — we’ll probably get this later — but SNAP, Medicaid, those things still need to be strengthened, and we need to help those people who are still trying to recover from the Great Recession.

VALLAS: And of course, you’re naming a lot of the programs that remain squarely in the crosshairs of the Trump administration, often with the argument being lobbed about that, this is the, “best economy ever,” as though we don’t need those kinds of forms of assistance anymore. But you’re basically arguing we very much still need them, and in part, because of exactly what you’re describing.

So, getting into the next recession and the potential threat that that it offers, you got some prognosticators out there saying that the next recession might be right around the corner. You’ve got others maybe painting a slightly rosier picture. You’ve got some people kind of reading the tea leaves on the trade wars that Trump is starting and getting worried about that and watching the stock market very closely. How will we know that a recession is coming?

AJILORE: So, the technical definition of a recession is when we have two consecutive quarters of negative GDP growth. And so, we’re always going to be looking at the GDP numbers first and foremost. And looking at GDP more recently is that we still have GDP growth around 2 percent, but what we want to look at is specific components of GDP. So, it’s basically made up of four components: consumer spending, business investment, government spending, and net exports, and that’s the trade sector. And looking at some of the numbers, some of the underlying numbers, consumer spending is what’s keeping GDP growing. Business investment has been negative. Net exports has been negative, primarily due to tariff and the trade wars. And so, we focus on consumer spending.

The other thing we look at is unemployment numbers and general labor market outcomes. And so, unemployment’s still low, even though for certain groups it’s much higher. But everyone is doing pretty well when it comes to the labor market. So, we know that consumer spending may still be OK. So, the thing we want to focus on is consumer spending.

Some other aspects are you look at manufacturing, and so manufacturing index has been negative recently so that some people are arguing that we’re in a manufacturing recession. So, there’s a lot of factors that we look at, but primarily as GDP. And as long as consumer spending is still growing, even though we don’t want to focus on consumers only, then we know that we’re not hitting a recession. But once those numbers start to dip, that’s going to raise red flags.

VALLAS: Now, the Great Recession isn’t just still leaving scars in people’s lives. It also leaves behind a lot of lessons for economists and policymakers to take away as they think about how we can be prepared for the next recession. Because, as you pointed out in your testimony and as you’re pointing out now, it sort of doesn’t matter when it hits. What matters most of all is that we be ready for it when it does. So, what are the tools that the government has available to fight a recession when it does hit?

AJILORE: So, when a recession hits, we basically have two forms. We have monetary policy, which is conducted by the Federal Reserve Board, and that’s primarily with their federal funds rate or interest rates that we talk about. And then fiscal policy, that’s done by the legislative executive. And so, Congress will pass bills; the president will sign off on big spending bills. So, we had the stimulus package back in 2009, which economists have now found in research was not as big as it should have been to help us get out of the Great Recession. And the other thing was that in 2011, we actually engaged in austerity measures when the economy wasn’t fully recovered. So, we know that in the next recession, what we need to do is have bigger, better stimulus package. And then with monetary policy, interest rates are around 2 percent right now, so it’s going to be less effective. And the Federal Reserve is going to have to use alternative measures to help boost the economy.

VALLAS: So, that’s monetary policy and fiscal policy. It sounds kind of wonky. But as you described, really, really important levers that the government has available in these types of contexts. But then there’s also this buzzword that you hear economists like yourself use all the time and sounds really wonky, but I really want to spend some time on this because of how significant it is. And that’s the concept of an auto stabilizer. What is an auto stabilizer, and why is it important in the context of a recession?

AJILORE: So, an automatic stabilizer is a automatic policy that doesn’t need to be done by either the Fed or the federal government that kind of helps the economy stay at a even keel. And so, we talk about it more in terms of when there’s a downturn and that the amount automatically triggered when it kick in. And this is, you hear a lot about it because it’s very important, because when I talked about monetary and fiscal policy, that’s what happens when we’re in a recession. But prior to a recession, the things that we could do to help us once the recession hits, that we could immediately help the economy recover. So, we can think about it as a soft landing. The GDP falls, the economy tanks, and then we want to have that soft landing to bounce back up and recover. And so, automatic stabilizers are the things in place to help the economy recover quickly.

The most common type is unemployment insurance, that when people lose their jobs, they receive benefits to help them have time to find a new job. But other: SNAP, Medicaid, there’s a number of different programs that could be used as an automatic stabilizer when the economy hits a downturn.

VALLAS: And those were exactly the types of programs that were incredibly important in the Great Recession, did a lot to help us bounce back. Also, were really important in the lives of individuals. So, bring us back to the Great Recession as we think about lessons learned. What was effective then? Talk about the function of auto stabilizers back then. And then I’m sort of asking this question in hopes that you can also give us a little bit of a comparison to where we were when the Great Recession hit and how things look now. Are they the same, or are they different?

AJILORE: So, during the Great Recession, unemployment insurance was very crucial in helping people get back. There are numbers of like 5 million people to help them recover and prevented 1.4 million foreclosures. One of the other things that doesn’t get talked a lot about, unemployment insurance or automatic stabilizers in general, is the stimulus effect. So, we always talk about these programs as it helps out the individual, which it does. But in helping out the individual, we’re helping out the economy in general. And so, there’s a study — I think it was Mark Zandi at Moody’s was saying that the stimulus effect, the multiplier effect of unemployment insurance was for every dollar spent on UI benefits, added two dollars to the economy. And so, that’s what helps give us the recovery, provides the boost.

Now, what’s happened since then is very disheartening that one of the things in terms of unemployment insurance during the Great Recession, all states had a maximum benefit duration of 26 weeks so that you have up to 26 weeks to take benefits. Now, because of how strong the recession was, a lot of states ended up depleting their trust fund and therefore had to borrow from the federal government. Now, in response to that, instead of trying to boost revenues, what they did is they cut back on benefits, cut back on eligibility, made it more restrictive. And so, you have a number of states, up to 10 states now, that have reduced their maximum benefit duration from 26 weeks down to 20 weeks, some even 14 weeks, which is just the opposite effect. And so, the way to think about that and think about it in terms of spending, during the Great Recession, there were certain states that, that first payment that you get would be on average, say, $3,000. That same person, if a recession were to hit today, would get $2,000. Now. That’s a $1,000 hit for that individual, but using a multiplier of two, that’s a $2,000 hit to the economy. And that, you know, consumer spending is going to be less now than it was before. And so, that’s why we have to kind of sound the alarm about automatic stabilizers, make them stronger, make them more effective, have a stronger stimulus of impact.

VALLAS: Now, you described how UI has, in some way, sort of withered on the vine because of what has happened in the years leading up to now when it comes to state unemployment insurance policy and the number of weeks that are offered as states have sort of hacked away at their UI programs. Another startling statistic that I felt we would be remiss if we didn’t mention in this context is that when you actually look at who is eligible for UI, before you even get to the number of weeks that people might be able to receive under their state programs, just one in four jobless workers today actually end up receiving unemployment insurance. And that might baffle people who are listening to this right now. They might be thinking, yeah, if I lose my job, UI is going to be there for me because I lose a job through no fault of my own. Therefore, boom, unemployment insurance. Isn’t that how it works? But it’s not that simple, and it’s not there for a lot of workers today for other reasons.

AJILORE: Yeah. So, it’s become, the take up rate, has become a serious issue. One of the things they have done is strengthen their eligibility. And but the other thing is that they’ve done is they’ve tried to go to an automated system where you have to file online, which there’s no resources to help people out. But then you have to think about it, especially in rural communities where there’s no broadband. How are you going to fill it out online? Other things: they add more restrictions as you know, you have to apply to X number of jobs per week. But if you live in a rural community where there’s only three employers, how can you fit that? And so, what ends up happening is that people can’t maintain these requirements, and then they get bumped off.

The other problem is that there’s these automated systems for disqualifications where they say, oh, well, you are, you know, to try to prevent unemployment insurance fraud. And I go back to a recent case in Michigan. They have this new program called MiDAS where they had disqualified almost 60,000 people. And then our study showed that 93 percent of those people were falsely accused. Now, what’s happening here is that it’s not just like, oh, well, this person can’t get benefits, but they are charged for taking benefits. And so, you have people owing up to $10,000, $15,000. And the way they find out is either through IRS garnishment or wage garnishment or restrictions of IRS refunds. And then the process of going through. So, you have all these people who now are going through these really onerous, tough problems and trying to pay this back when they weren’t even charged, shouldn’t have been charged to begin with.

And so, you have all these problems that’s making it just harder for people to spend. And the worst part, I mean the worst part is what’s happening to the individuals. But the other part is that these states are shooting themselves in the foot, because now these are people that can’t spend and help boost their economy. And so, you have all these things that make it worse for the individual, which is then making it worse for the economy. So then, if a recession hits, now the whole country is screwed.

VALLAS: And isn’t a big part of what’s going on as well the rise of gig workers who don’t have the same kinds of protections as other workers?

AJILORE: Right. So, there’s a whole section of people who aren’t even eligible for unemployment insurance if they haven’t worked long enough or they’re new entrants to the market or they’re contractors, gig workers. And so, these people, if they lose their job, there’s no unemployment insurance for them. And again, that harms the economy. it harms state economies. It harms the national economy.

VALLAS: So, you’re describing all the different ways, or many of the different ways, that the unemployment insurance system isn’t quite what we need it to be to be ready for the next recession. Sort of backing up a little bit and putting that in context with the rest of the picture that you were painting, you argue that we’re very much not ready for the next recession. What are the other reasons that you’re worried?

AJILORE: I’m worried basically because of the automatic stabilizers. And I think the biggest thing that worries me is that it’s one thing if we’re talking about let’s say, you want to have make SNAP more of an automatic stabilizer so if we hit a downturn, then it’ll trigger, say a 50 percent increase in benefits. But we’re taking steps to make it actually less ready, and we keep going backwards and backwards. So, we think about the addition of work requirements on Medicaid. You know, this is kind of thought, this premise, that people who are poor are poor because they don’t want to work, or they’re lazy. And we’ve seen this for so long, and it’s so depressing and disheartening when people do want to work, and there’s difficulties.

There’s already, in a good economy, in sort of quote-unquote “tight labor market” that people like to argue, there are people who still struggle. So, we’re looking at people of color, people with disabilities. Those people already are behind the eight ball when it comes to trying to find a job. And now you’re adding these work requirements that make it even harder for them to find a job. And so, that if we hit a downturn, they’re going to be the first people to lose their jobs. And then it’s going to end up hitting other people. And then because we’re not giving people money to spend to boost the economy, that’s going to have a feedback effect and cause other people to have longer jobs. And though we may not have a recession like the Great Recession, the impact that’s going to have on the economy, the time that it takes to recover is going to be worse than before because the things that we had in place before are no longer there or are weakened.

VALLAS: What are you hoping that Congress takes away from your testimony, from the cautionary tale that you’re painting here, and from the warning signs that you’re seeing?

AJILORE: I think the biggest thing is we need to be prepared. And so, one of the Congressmen during the hearings talked about this is like a hurricane. We have meteorologists who tell us about the, kind of give us the data on a category, let’s say Category 5 coming. Now, we don’t know if it’s going to make landfall. We don’t know if it’s going to be a Category 2 or 3. But whether it is or not, what we do know is that we need to board up our houses. We need to get battery generators and make sure there’s fuel for that. We need to make sure our batteries are in our flashlights. We need to do the things get prepared so if the hurricane hits, we’ll be prepared. And right now, we’re not doing any of those things. And if a hurricane comes, it’s going to be devastating.

VALLAS: If you want to nerd out more on Gbenga’s worrying testimony and also the policymaker recommendations that he’s offered a little bit of in this conversation now, you can find his testimony as well as a couple of the pieces he’s written recently on preparing for the next recession, of course, on our nerdy syllabus page. Gbenga, thanks so much for taking the time to come back on the show. Gbenga Ajilore is a senior economist at the Center for American Progress and one of my favorite people to have on.

AJILORE: Oh, thank you very much for having me.

And that does it for this week’s episode of Off-Kilter, powered by the Center for American Progress Action Fund. I’m your host Rebecca Vallas. The show is produced by Will Urquhart and David Ballard. Find us on Facebook and Twitter @offkiltershow, and you can find us on the airwaves on the Progressive Voices Network and the We Act Radio Network or anytime as a podcast on iTunes. See you next week.

♪ I want freedom (freedom)

Freedom (freedom)

Now, I don’t know where it’s at

But it’s calling me back I feel my spirit is revealing,

And now we just trynta get freedom (freedom)

What we talkin’ bout…. ♪