Latest estimates by the Arizona Department of Revenue indicate that the state overpaid 3,000 claimants a total of $6.3 million in a lawsuit over illegally collected taxes.

That total of overpayments, caused by a series of computer glitches, is $800,000 more than an earlier estimate of $5.5 million.

DOR spokesman Dan Zemke explained the difference. The $5.5 million covered overpayments in excess of $1,000, Mr. Zemke said. The $6.3 million total includes overpayments of $1,000 or less.

Known as the Ladewig case, the settlement, with a cap of $350 million, involves more than 306,000 taxpayers who claimed dividend income in the late 1980s. The estate of a deceased taxpayer, Helen Ladewig, filed a class action suit in 1991, challenging the state’s practice of taxing dividends on out-of-state corporations but not taxing dividends on in-state corporations.

Rep. Pearce: ‘Government At Its Worst’

Rep. Russell Pearce, R-18, chairman of the Joint Legislative Budget Committee, called the previous taxing practice “discriminatory and bad policy.” He said the overpayment snafu and the administrative cost estimates of DOR represent “government at its worst.”

Mr. Pearce also assailed the amount of money set aside for attorney fees included in the settlement. “As a taxpayer, I’m offended at the payoff to attorneys. It’s taxpayer money. They’re taking advantage of lottery-type payments, which rarely have anything to do with justice. Sure, they deserve to be paid, but let’s get reasonable. The state should have settled that claim without a lawsuit.”

Tort reform, said Mr. Pearce, would “curb these lottery payouts” to lawyers.

Mr. Zemke said attorney fees total $12 million, but could increase before final payments are made.

DOR sent letters on June 28 to the 3,000 claimants who were overpaid, including to a married couple who each received $750,000, the largest of the overpayments.

On July 1, Mr. Zemke said DOR had received a few responses and inquiries regarding the overpayments.

“There was general acceptance,” he said. “They want to know. ‘When am I going to have to pay it back?’”

The letter noted that the courts will make a decision on the overpayments and possible repayments.

Superior Court To Decide On Overpayment Issue

Maricopa County Superior Court Judge Paul Katz will decide on the overpayment issue in September. In the meantime, Mr. Katz ordered no further payments to those who were overpaid, and that the second installment to all other claimants should be made this month.

Mr. Pearce adamantly said, “We’d better get our money back. If we owe a taxpayer money, we pay it. So it works both ways. It was the state’s fault, and it’s up to the court to decide if the overpaid taxpayers will have to give us our money back. I suspect most people will do us right.”

Mr. Pearce said he is not comfortable with some of the calculations contained in a June 20 memo on the Ladewig case prepared by the JLBC staff.

“We don’t know how good these calculations are when you take into account the overpayments,” he said.

JLBC Report

The JLBC staff recommends that DOR report to the committee after the taxpayer refund issue has been resolved, including an updated total cost of the Ladewig settlement.

DOR currently estimates the total cost at $308.5 million, but JLBC staff cautions that the numbers are not final.

Half of the amounts of taxpayer refunds were paid in fiscal 2005, roughly a year ago. The second payment of 25 percent is to be paid this year, with the final 25 percent due in fiscal 2007.

The JLBC memo listed DOR administrative expenses at $8.58 million in fiscal 2003, $3.74 million in fiscal 2004, and estimates of $3 million in fiscal 2005, $1.75 million in fiscal 2006 and $2.56 in fiscal 2007, for a total of nearly $20 million.

Overpayments Caused By Computer, Clerical Errors

The memo states that DOR blames the overpayments on clerical and computer matching errors. “DOR reports that they have corrected the errors they have found, and are working to avoid future problems,” the JLBC staff memo states.

Among the errors listed were:

• Certain optical character recognition data recovered from microfiche tax returns for 1986 through 1989 were manually entered into the wrong field.

• Various data input errors were made by temporary staff.

• Various technical calculation errors were made involving taxpayers who used the optional tax tables, and previously audited and adjusted returns.

• The mainframe computer truncated two high-dollar amounts, which produced the largest overpayment.

DOR has also identified underpayments of refunds to taxpayers. “However,” the JLBC memo states, “the department does not know how many underpayments occurred, since they corrected their records and issued supplemental refunds as the underpayments were found.”

DOR reports having issued 72,000 additional warrants for reasons such as estate changes that added or changed heirs, and reissuing of stale dated warrants, as well as for supplemental refunds. —