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From Governing’s
So Minnesota decided to develop a strong compliance system of its own. It did that so well that it now stands out from the pack. Under the old system, the state used to catch about 4,000 scofflaws every year. Now, citizens who treat tax fraud as a minor offense comparable to jaywalking are given a rude awakening. In 2000, the first year of the new compliance program, the Department of Revenue uncovered about 20,000 individuals who owed a total of $73 million. Since then, another 24,000 cases have been placed under investigation.
Technology has been a key. By automating relatively simple processes, the state freed up auditors for more intensive footwork — for example, going after cash businesses whose owners had a sales tax license but weren’t declaring any income. The Department of Revenue also has the legal authority to terminate a professional license if someone fails to file or pay. These activities have generated lots of publicity, says McClure, “and that’s part of the plan. Publicizing your efforts goes a long way to getting better voluntary compliance. It’s like the highway patrolman. If you see one, you slow down.” Technology hasn’t just helped the state find tax evaders; it’s made life easier for the compliant as well. Several years ago, Minnesota took a cold-turkey approach to making businesses file their returns electronically. It provided a year’s advance notice that the state no longer wanted paper returns. Four years ago, nine out of 10 withholding and sales tax forms were filed on paper. By last year, things had changed dramatically: 90 percent were filed electronically. The Department of Revenue religiously tracks its own performance with a host of measures, including customer-satisfaction surveys, that are available on the state Web site. What’s more, it carefully considers the impact of tax decisions on its population. Minnesota is one of only three states that frequently examine and report on the demographics of their tax base and the way different income groups are impacted by different taxes. This analysis is used when the legislature makes decisions. For example, the creation of tax-free education savings accounts was rejected in 1997 after a Department of Revenue analysis showed that the bulk of the benefits would go to families with incomes over $100,000. The state’s education tax subsidy was subsequently rewritten to benefit low- and middle-income taxpayers. Minnesota is also a leader in managing economic development tax incentives and requires corporations that seek them to make far more comprehensive disclosures than other states demand. It holds the companies accountable as well, following up on job-creation promises and demanding the return of subsidies if companies move away within five years of receiving a tax credit. Where the tax code runs into confusion is in the roster of sales tax exemptions. The ones for food are especially quirky — juice drinks, for example, are subject to taxation if the bottle contains 50 percent or more real juice. If it’s 49 percent, they’re not. Some other exemptions are equally mystifying. Tree planting isn’t taxed; tree stump removal is. The state would also benefit by taxing more services. When former Governor Jesse Ventura proposed an aggressive plan to do so, it was blocked by the legislature. Some services have been singled out for taxation in the past — generally when the state has been desperate for more money. “The folks being taxed were not well organized — like dog groomers or window washers,” says Dan Salomone, executive director of the Minnesota Taxpayers Association. Better-organized groups, such as doctors, lawyers and accountants, haven’t been hit by any sales taxes here. Minnesota’s current budgetary problems are due not only to its weakened economy and major losses in capital gains revenue but also to the fact that it enacted a $1 billion tax cut in 2001. The resulting imbalance for the next biennial budget, which takes effect in July, is now estimated at $4.2 billion. But Minnesota, unlike most other states, at least tied the cut to property tax revisions that promise to create a more rational system for funding education. In the past, state leaders were able to make lofty decisions about educational improvement and then let local governments worry about funding them. Now, a statewide property tax on business has replaced mandated local property taxes for schools, placing responsibility for elementary and secondary education funding directly in the hands of statewide elected leaders. In the current budget, legislators protected education and made cuts elsewhere. “They had to make the choices as to which priorities they were going to fund,” says Matt Smith, who left his job as state revenue commissioner late last summer to become finance director for the city of St. Paul. “That to me has been the most significant tax and budget policy change in several years, and it presages what is going to be happening at other places around the country.” Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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he not-so-well-kept secret of state tax administrations is that their efforts to ensure compliance tend to be underfinanced, weak on staffing and technology, and thus hard put to catch many cheaters. In the income tax arena, many states rely almost exclusively on the Internal Revenue Service, matching federal returns with state returns to seek out discrepancies and following up on IRS audits. Minnesota was one of those that used to do that, but in the mid-1990s, in the words of state tax director Jerry McClure, “the IRS presence just fell off the table.”