I had the pleasure and responsibility of leading Arizona’s Department of Revenue for nine years. The Department of Revenue (DOR) is charged with, among other duties, ensuring that each taxpayer, whether a person or business entity, pay their fair share of taxes. But it can only fulfill its mandate if it is sufficiently staffed to provide a vigorous enforcement program. Even technological advances cannot replace a person looking at the supporting information in the books and records of the taxpayer. Doing this historically has shown to improve voluntary compliance as well as bring in unpaid taxes that, on average, exceed 10 times the cost of staffing to conduct audits and licensing enforcement.
According to the Joint Legislative Budget Committee, enforcement staff at DOR has plummeted 42 percent in the past two years alone. Compared to the Auditor General’s 2005 report, the decline is 60 percent. If the state had maintained its enforcement effectiveness that it sustained from 2006-2008 as a percent of incoming revenue, in 2016 the state would have easily netted an additional $82 million or more.
The trend in declining discovery and payment of unreported taxes owed is set to continue in 2017 as the number of corporate auditors has reportedly dropped from 30 to four at the end of fiscal year 2016. During the first six months of fiscal 2017, corporate auditors collected less than $5 million, a small fraction of the nearly $34 million produced by corporate auditing in the prior year, according to figures from DOR.
Arizona has a complex tax code, yet has about half the staffing per resident in its DOR relative to similar departments in other states. Florida, which has the lowest number of total state employees per state resident in the country, has more than twice as many employees per state resident in its DOR. While automation of some functions has undoubtedly created some efficiencies and this may be increasingly true for front-end transaction privilege tax system compliance, corporate auditing efforts and licensing enforcement require field work by staff in most instances.
During my time, DOR enforcement staff annually found hundreds of businesses that were operating, but not properly paying state transaction privilege and/or corporate income taxes, and sometimes failing to remit personal income taxes withheld from employees.
The lack of a vigorous audit, collection and licensing enforcement effort leads to evasion, fraudulent reporting and failure to discover unintended errors many taxpayers make in filing and paying taxes.
From 2006-2011, the most recent data I could access, the likelihood of a corporate audit fell from one in 125 filings to one in 280 filings. As a result, a small fraction of businesses not remitting their taxes are impacting the ability of lawmakers to meet the fiscal demands in this year’s budget.
Over my years as Arizona’s DOR director, we were asked multiple times to provide an enhanced tax enforcement plan to raise revenues when the economy slowed and money was needed to sustain funding for essential health, safety and education programs. Implementation of these enhanced enforcement programs raised revenues each time without the need to raise taxes from businesses and people already paying their fair share.
For an investment of only $2.3 million, DOR could hire 30 more corporate auditors and eight support staff. My experience found corporate auditors and necessary support staff brought in $12 for every dollar expended on them, meaning $27 million in more revenue to the state.
This simple addition to the budget nets more than $22 million for the state, after sharing with local governments, and improves fairness to other taxpayers who pay what is legally owed.
Rural counties are concerned about the continued use of Highway User Revenue Fund dollars taken for the General Fund as their roads are in serious disrepair. Others are concerned about ensuring better funding for education. $20 million doesn’t erase all those issues, but definitely helps.
Very likely far more dollars could be gained with improved tax enforcement, but adding corporate auditors is an obvious step.
It’s a win-win for the state and those that already comply with the state’s tax laws.
— Elliott Hibbs, a former director of the Arizona Department of Revenue, serves on the board of the centrist Grand Canyon Institute and was the principal author of its recent report, “Enhanced Revenue Enforcement Creates Fairness, Raises Millions in Revenue.”
The views expressed in guest commentaries are those of the author and are not the views of the Arizona Capitol Times.