Thursday, November 2, 2017

Tax audit revenues are tanking - Arizona loses $10 to save $1

For those of you who do not take the Daily Star your Scriber is alerting you to a story of mismanagement carried this morning on the front page: “Arizona tax-audit revenues down $75 million after staff cuts.” The original story was reported by The Republic in Arizona is auditing fewer businesses. Now state revenue is down. Snippets from that report follow.

As Arizona leaders have built budgets that leave little room for teacher raises and other popular spending priorities, the state has cut back on efforts to ensure taxpayers — especially businesses — pay what they owe.

The Arizona Department of Revenue, the state’s tax collector, has instead emphasized customer service andcollecting sales taxes on behalf of cities statewide.

The effect? Revenue from audits fell from $155 million in 2016 to $80 million in 2017.

To put the decline in perspective, it is more than triple the $24 million budget shortfall state budget officials expect at the end of the current fiscal year. And it occurred in areas where the agency has cut staffing: corporate auditing and in checking business licensing for sales taxes.

It comes a year after experts warned state lawmakers that layoffs in the agency’s auditing department at that time would eventually cut its collections.

The number of corporate auditors has fallen from 30 in 2001 to 10 in 2016. The agency now has six auditors, said Ed Greenberg, a spokesman for the agency.

To put this in another perspective, consider the number of auditors per taxpayer.

Before the 2017 budget, audit collections had remained relatively stable for years even as the revenue agency whittled away its workers. Between 2008 and 2016, audit revenues averaged $146 million annually.

That finally gave way as staff reductions that began a decade ago deepened, agency records show.

In 1996, there was one auditor for every 24,000 individual taxpayers in Arizona. By 2006, it was one for every 67,000 taxpayers. In 2016, the number had risen to one for every 192,000 taxpayers.

It’s a similar story for corporate and sales-tax auditors.

In 1996, there was a corporate auditor for every 1,100 filers. By 2016, it was 4,800.

There was one sales-tax auditor for every 1,600 filers in 1996. In 2016, there were 5,700 filers for each auditor.

Tax experts say auditors have their greatest effect on corporate and sales-tax collections because the financial stakes are much higher.

Now consider the return on investment - and what the lack of such investment means for Arizona going ahead.

Tax experts say the loss of auditors could cost the state even more in the years ahead, as businesses adapt and become more adventurous on their tax returns knowing there’s little risk of serious scrutiny.

“As the risk of detection goes up, the probability that an individual or a corporation is going to evade taxes, or be really aggressive on their taxes, goes down,” said Daniel Lynch, an assistant accounting professor at the University of Wisconsin who has researched state-level auditing.

Cutbacks in enforcement, meanwhile, eventually lead to lower compliance. “The question is how much, but the direction is pretty well accepted,” he said.

In a study of nine years of state tax data, Lynch found that for every dollar spent on auditing, agencies got back between $8 and $11 in collections.

Others share that view of auditing.

“The reason many taxpayers comply with the tax laws is because they don’t want to get audited and found that they owe not only back taxes, but penalties and interest,” said Elliott Hibbs, who headed the Arizona Department of Revenue under former Gov. Janet Napolitano. “It is penny-wise and pound-foolish to cut the Department of Revenue when every dollar spent on enforcement can bring in more than $10.”

So what Ducey and his predecessors have done is to throw away ten dollars to save one dollar. That, friends, is the nadir of mismanagement. We need a different governor with different priorities.

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