States’ back taxes get back-filled with federal dollars

State revenue streams across the nation are shot. This, according to the National Conference of State Legislatures, who released a report earlier this month detailing an aggregate $40 billion budget gap for state governments. The news coming from the Nelson A. Rockefeller Institute of Government is not much better. Their latest numbers show personal income taxes down a whopping 26 percent from last year. And earlier this year, the Rockefeller Institute reported the worst decline in sales tax collection in fifty years.

But, just because the economy is in the doldrums does not mean the pied piper can be left wanting.

In an effort to help state and local governments figure out ways to maximize their tax revenue recovery efforts, Governing.com held an online forum this week, highlighting best practices from tax officials in Maryland, Virginia and North Carolina.

A major theme of the discussion was the need for automation through the use of verifiable, accurate data. Charlie Helms, Director of the North Carolina Department of Revenue division of collection, said, “We’re always looking for new and better ways to streamline the revenue collection process.”

“The more data about debtors your have, the more successful you’ll be in collecting from them,” Mr. Helms continued. “But storing and setting up data warehouses can be a difficult and expensive task.”

Maryland Deputy Comptroller Linda Tanton agreed, saying the key to recovering owed taxes was through enhanced collection tools, such as periodic billings, distributive phone systems, cost-benefits analysis, automated case flows, and automated case flows. “The more you can put on the website, the easier it is for taxpayers and the more likely they are to take care of their debts,” she said.

Ms. Tanton also mentioned a growing strategy being used in Maryland involving license clearances. In Maryland, state agencies must verify taxes before renewing professional licenses. The state issues 450,000 licenses a year, through six agencies, for those who wish to become engineers, insurance salesperson, doctors, carpenters, plumbers etc. “It’s been a wonderful tool for us. Since 2003 we’ve recovered over $25 million.”

Increasingly, State and local governments, in conjunction with the federal government, are exploring another avenue of debt collection, called debt offsets.

In Arlington County, Virginia, Treasurer Frank O’ Leary is pushing federal legislation to make his county’s practice the rule, not the exception.

When Mr. O’ Leary came into office the county’s tax delinquency rates were over 9 percent. Now the delinquency rate of debtors who fail to pay on back taxes is seven-tenths of one percent. Much of what Mr. O’ Leary attributes his success to is the practice of debt offsets.

“Debt offset is one of the simplest processes to get back taxes,” Mr. O’ Leary said. The process involves matching social security numbers at the state and federal levels and then when the federal government sends payment to an individual (in the form of retirement payments, federal income tax refunds, vendor payments and some federal salary payments, etc.) who owes the state taxes, the money is redirected to the state.

Mr. O’ Leary is working to expand debt offset from states to localities, using the existing network, so county and city municipalities can also recoup money owed in back taxes.

“It could save $2 – $3 billion per year for local government,” Mr. O’ Leary contends.

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