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Revenue Redux

Sympathy for the taxman.

In biblical times, we are told, a tax collector named Zaccheus had a penchant for overtaxing the citizens of the ancient city of Jericho. The reputation stuck, and it has bedeviled tax collectors ever since.

The irony is, in modern times, many governments do not collect all the tax revenues properly owed to them. The lapse is largely due to visibility -- the taxation authority is unable to accurately assess what is owed across the various tax types or identify taxpayers who are slow-, no- or partial-pays. A recent review by the Center for Digital Government indicates that 41 states can't accurately tally, prioritize or manage uncollected revenues.

Increasingly sophisticated diagnostic, analytic and predictive technologies offer an attractive proposition to taxing authorities in the midst of a continuing revenue recession: collect more money without raising tax rates.

This emerging practice does not yet have an official name. Many public agencies use the term "revenue recovery," while Bill Eggers of Deloitte Research and the Manhattan Institute for Policy Research -- whose market-oriented writings about government are familiar to readers of this magazine -- prefers "tax discovery."

The two terms work together well. "Recovery" suggests finding what was lost, while "discovery" brings with it the sense of exploration and intones the legal obligation to keep these activities within the four corners of the constitution.

If the approach works -- and it apparently does, as evidenced by the experience in five states where a combined $1.5 billion has been returned to their respective treasuries -- why isn't everybody doing it?

The reason is at least threefold. First, tax agencies would have to break the illusion that we all pay our fair share. Some clearly are not -- and they are not just fat cats with high-priced accounting help.

They are the people whose relative value in terms of uncollected receipts is unknown. Talking about these people is a difficult conversation to have before an appropriations committee, on talk radio or even in a policy-oriented blog.

Only nine states can systematically locate delinquent taxpayers -- and prioritize their records to see where the best recovery prospects are, which are defined by a combination of high unpaid balances and how long they have been owed. There is an inverse relationship between the age of the tax debt and the odds of recovery.

The second and third are technological and fiscal, respectively -- the challenges of retrofitting existing tax systems and paying for the enhancements.

My colleague Mark Struckman, research director at the Center for Digital Government, recently examined the status of more than 100 tax systems across the country -- with an 80/20 split between state and local -- through the eyes of the people who ran them.

Approximately one-fifth of state and local respondents indicated their systems are at or near high functionality; just fewer than half of state systems and a quarter of local systems were considered good enough for current operations; and one-third of state systems and more than half of local systems were aging and needed replacing.

What if enhancements to high function systems, the refreshing of good systems and the replacement of the others could pay for themselves? That is exactly what happens under an arrangement known as "gain sharing" or "benefits funding." The model is one of 13 approaches to reducing reliance on general fund appropriations examined in a new report from the Center called Pay IT Forward: Doing the Public's Business while Reducing Pressure on the General Fund.

At its core, gain sharing involves paying vendors for the new system through a share of the increased tax revenue. Governments may pay retail pricing for the new systems, but are not required to produce an upfront investment -- an attractive option in these times.

The approach requires tax agencies to admit shortcomings in their current processes, open their books to third parties and seek specific authority from the legislature. None are easy decisions, but they are no harder than those faced by budget writers again this year.

At least 19 states are anticipating legislative budget battles in 2004 characterized by both sharp spikes in demand for services and smaller budgets -- not just smaller budget increases. It's hard to see how it adds up without taking a different approach to the revenue side of the ledger.
Paul W. Taylor is the Senior Editor of e.Republic Editorial and of its flagship titles - Government Technology and Governing.