Tuesday, September 3, 2013

Fred Thompson: Taxes Don't Collect Themselves

Fred Thompson checks in again!  

Wednesday morning I attended the Interim Revenue Committee meeting in the Oregon State Capitol. The headline topic was the September economic and revenue forecast presented by Mark McMullen, State Economist, and Josh Lehner of the Department of Administrative Services’ Office of Economic Analysis (they predicted more lackluster growth). But I was there primarily for the update on the Department of Revenue’s (DOR) core-system replacement project, presented by agency director Jim Bucholz, and project manager Eric Smith.

This project, which has been in the works for several years, was finally authorized at the tail end of the legislative session and is scheduled for kickoff in October. Over the next four years, it will replace DOR’s thirty year-old information systems and processes and promises to upgrade DOR’s performance materially. Arguably modern IT systems would use artificial intelligence algorithms to determine how best to process each account and do so on a just-in-time basis, thereby minimizing discrepancies between processing time and cycle time and maximizing collections.

This spring, a group of my students looked very carefully at the DOR’s processing of past-due accounts (so called liquidated and delinquent accounts). They estimated that a one percent reduction in processing cycle time would increase past-due accounts collections by >.5 percent. They observed that obsolete information technology substantially retards the speed and the accuracy with which the DOR identifies failures to file, filing errors, and payment delinquencies, impedes execution of the collections process, and slows decision making almost to a standstill. The current collections process operates like a series of fallible filters. Accounts receivable are processed more or less in their order of arrival to a revenue agent’s (RA) in-basket. Processing follows a series of prescribed steps in which the account moves from RA to RA, often spending far more time awaiting processing than being processed. Only when these steps fail, is the account subjected to additional scrutiny and assigned to the next higher level of collection effort. Paradoxically, these procedures appear to subject the most difficult accounts to the greatest delay. As a result my students concluded that if core systems replacement reduced processing cycle time by only 20 percent, it would pay for itself in seven years (or less) from increased collections alone, which is really quite remarkable given that the project won’t generate substantial operational improvements prior to its completion.

Jim Bucholz and Eric Smith did not make their case for the core-systems replacement project in terms of improved performance. Indeed, they very careful to make no performance-related promises. Instead, they emphasized the need to upgrade (replace) antiquated systems and equipment (COBOL programs and green screens) and sought to reassure the committee that this project would not be Oregon’s next information technology disaster. They noted that they were buying an off-the-shelf system that had been successfully installed in 16 other states for a firm fixed price.

Two issues that did not come up in this forum were DOR’s choice of a contractor and overall performance of the DOR. Frankly, I think they made a pretty canny choice of a contractor. Fast Enterprises is relatively small company, but it is the leading supplier of integrated tax-processing systems to state governments. Its principal competitor, CGI, works with fewer than half as many states and, largely based on word-of-mouth, is growing much more slowly. Moreover, Gen-Tax is Fast Enterprise’s main business; tax, revenue and government collections management is a sideline for CGI.

Both the legislators and most of the folks present at the hearing seemed pleased with the overall job DOR is doing. Mostly this assessment seems to be based on the fact that Oregon spends thirty-to-forty percent less than the average state to collect a dollar of revenue. But this fact probably has very little to do with the DOR’s operational excellence and a lot to do with the state’s tax structure. Unlike most states Oregon relies on a single revenue source, the personal income tax (PIT), which means it needs only one administrative apparatus to collect its revenue. Every tax type requires its own collection organization and every one of those organizations costs money. Moreover, to the extent that our PIT and business taxes are aligned with the U.S. tax system, we can piggy-back on the efforts of the IRS to combat tax evasion and excessive avoidance.

Arguably, however, we carry that virtue to excess, relying on the good people of the state to pay what they owe more or less voluntarily; most do, some don’t. One way to assess the performance of a tax system is to look at the difference between net revenue (revenue less the cost of collection) and potential revenue (given the tax base and rate structure). We call this difference the revenue gap. Oregon’s PIT revenue gap is quite a bit higher than the national average and its business tax gap one of the largest. An additional reason our collection-cost per revenue dollar is low is that we spend less than other states to combat tax evasion and avoidance; consequently, we probably do a poorer job of identifying non-filers and under reporters. This is especially likely where our statutory rates are higher than those of other states or where our tax code deviates from the federal tax code. Each of these factors calls for greater investment in collecting taxes and that investment has been put off for far too long. The core-system replacement project is a timely down payment on what needs to be done.

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