Introduction

Biting the Hand ...

here’s an old story about a stingy farmer who decided to put his horse on a severe diet. Weeks later, a friend inquired how the experiment was faring. “It was going great,” the farmer answered, “but just as I taught my horse not to eat at all, the damn thing died.”

Officials in state revenue departments can relate — to the horse. In a startling show of coast-to-coast short-sightedness, the vast majority of the states have cut back on tax department budgets. As Harold Fox, deputy director of the Division of Taxation in New Jersey, one of the few states to avoid such cuts, points out, “If you’re in a business, you don’t lay off the people that are bringing in the revenues.”

In most states, the cuts go on, creating misery in their wake. Oklahoma Tax Commission spokeswoman Paula Ross complains that the state was forced to hold off on writing refund checks this year, in part due to the budget cuts that required releasing the data-entry company that was inputting tax returns. With Arizona’s Department of Revenue suffering through cuts, as well as a strict hiring freeze, former director Mark Killian wrote a memo to the governor stating, “This will result in people — and ultimately the revenue they produce — being impacted.” And in Nevada, vacant positions are piling up. “Under our Taxpayer Bill of Rights, we’re required to make responses to taxpayers within a certain period. We won’t be able to do that,” one Nevada tax manager says.

This is really a pity. Tax departments are generally regarded as among the best-managed agencies in state government. The ultimate performance measure for tax administrators is in the collection of dollars. And not only has the need for those dollars never been greater, but the need for their tax auditing function is growing as well. As the U.S. Internal Revenue Service’s audit capacity has shrunk, for example, states have ever-greater obligations to do their own. In addition, state tax administrators provide oversight of property tax collection at the local level.

Meanwhile, revenue agencies need infusions of money to keep up technologically. Integrated tax information systems, for instance, allow states to gain access to wide-ranging data about individual taxpayers. Such systems are in use in a growing number of states, but most still don’t have them. Similarly, data mining, which allows administrators to cross reference various state records to help target recalcitrant taxpayers, is still in the infant stages in most states.

Faster progress is being made in the use of various means for easier filing and tax payment. According to the Federation of Tax Administrators, states are making significant progress in providing taxpayers with electronic funds transfer of payments and touch-tone telephone filing of tax data and payments. They are also offering a variety of electronic return filing approaches, such as Internet filing of taxpayer data or forms. Most recently, they have begun to incorporate within their tax forms scannable two-dimensional bar codes that enable electronic processing by the state.

A more serious area of shortfall is the ability to generate adequate data upon which to make sensible tax policy decisions. This activity may or may not fall under the auspices of the revenue departments, but clearly it’s a significant task. Few states have a good idea how much benefit they get from corporate tax incentives, for example. And only about one-fifth of the states can do a comprehensive analysis of how proposed changes in their tax laws would affect the amount of tax owed by different income groups in their populations.

More basic data are also lacking, such as knowledge of the level of tax compliance. States know how much money they’re collecting, of course. But they’re generally not sure how much they’re not collecting. According to Matt Smith, former commissioner of the Minnesota Department of Revenue, “You don’t really know fundamentally how many people are complying with tax laws as you pursue your normal business.”

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