Bang for the Buck – in Protecting and Generating State Revenue
One of the positive aspects of the Governor’s budget proposals is an investment in Department of Revenue positions to increase tax compliance and improve collection of state and local debts. But despite the fact that those additional positions will yield a tremendous return on the investment, some conservative legislators have balked at providing more staff for DOR. The issue may be debated in the Joint Finance Committee (JFC) this Thursday or Friday, May 29 or 30. (Update: JFC consideration of the DOR issues have been postponed until June 2.)
Last week the committee voted to amend the budget bill by adding a $5 million appropriation for a new initiative to prevent Medicaid fraud. (The new spending includes $500,000 in 2015-16 from state revenue, and $4.5 million from federal funds.) It’s a one-time expenditure to purchase and begin implementing new software intended to identify and prevent fraud. The Medicaid fraud prevention initiative may be a good investment in future years, but — in sharp contrast to the proposed DOR positions — no savings are projected during the current biennium.
The following graphic compares the Medicaid fraud amendment with the projected increase in revenue collections from two investments the Governor has proposed at DOR – additional auditor positions (LFB paper #560) and positions for debt collection (paper #561). The proposed increase of 102 positions to improve auditing (i.e., increased auditors and support staff) would focus on increasing corporate income tax compliance and improving sales tax collections among out-of-state corporations. In addition, the Governor proposed 11 DOR revenue agent positions to help collect debts owed to state agencies, the courts and local units of government.
Here are a few key points from the Legislative Fiscal Bureau’s analysis of the Governor’s recommendations:
- Adding 102 auditor positions will cost an estimated $25.4 million over the next two years, but is expected to yield $4.47 for each dollar invested — which amounts to a net return of $88 million.
- The additional revenue is expected to be in the range of $830,000 to $1 million per auditor (depending on the type of auditor).
- The net gain in the second year alone is $68.4 million (when the return per dollar invested grows to $6), which suggests that eliminating the auditor increase from the budget would worsen the state’s fiscal challenges in the 2017-19 biennium.
- The 11 new positions for debt collection are expected to yield an additional $37 million from debtors during the 2015-17 biennium, which amounts to more than $21 per dollar invested.
- Most of that $37 million would go to the state and local entities to whom the debt is owed, but $13 million would go to the DOR (of which, $1.75 million would pay for the positions and $11.2 million would lapse to the General Fund).
The Fiscal Bureau papers make it clear that there’s a tremendous return on the proposed DOR positions, and there will be a huge hole in the state budget if they aren’t approved. Let’s hope that JFC members care as much about preventing tax avoidance as they care about identifying and deterring Medicaid fraud.