Payback time for tax collectors
- By Dibya Sarkar
- May 16, 2002
"Benefits-Funded Strategies for Tax and Revenue Systems: Raising Revenue without Raising Taxes,"
With most state governments experiencing significant budget shortfalls —
a collective $40 billion according to estimates — some have become more
aggressive in recovering taxes that are owed them.
California, Hawaii, Kansas and Virginia, with the help of American Management
Systems Inc., recently reported increased success in collecting such owed
taxes. The AMS systems — installed at no cost and at different times in
the four states — have yielded a combined bottom line of $912 million since
1994, the Fairfax, Va.-based company reported in April.
That success may spur more state contracts for AMS, said John LaFaver,
vice president of the company's tax and revenue administration practice.
He's been spending a lot of time on airplanes negotiating with several states
interested in revamping the way they collect delinquent taxes. AMS might
sign another three to four states during the next year, which is a "conservative"
figure, he added.
Part of the allure is the "benefits-funded" procurement model AMS offers
states, in which states pay nothing up front and the company shoulders the
risk in implementing the technology. As part of the contract, AMS and a
state agree on a fixed price for a series of improvements in the form of
additional tax collections. Those "incremental" revenues are held in a special
account paid out to AMS until the contract is satisfied.
"I'm sure there was interest all along but in the past six months, there
clearly has been a substantial increase in the interest in states using
this approach," LaFaver said.
In setting up the systems, AMS first helps states revise their business
processes. Then, it implements a variety of different tax management software
systems on a single platform, depending on a state's needs. The integrated
system consolidates taxpayer registration and identification data, returns
processing and revenue accounting. The system can manage different tax types,
such as income, sales and use, corporate and withholding.
The company also provides auditors with a business logic system that
collects pre-audit data, does computations, generates correspondence and
produces reports. A version is available that runs on laptop computers to
remotely access case files and resources.
Of the $912 million generated by the four states, $194 million went
to AMS. "It really comes down to the confidence in your ability to estimate
the benefits stream," said LaFaver, who has headed the tax departments in
Kansas, Maine and Montana before joining AMS. "This is not rocket science,
but it is complex."
Verenda Smith, government affairs associate with the national nonprofit
Federation of Tax Administrators, said the goal of any tax agency is to
collect just the amount of tax determined by the state legislature.
"So they have always wanted to be as aggressive as they can afford to
be, which brings you to the point of your story — creative financing, which
this is about," she said, adding states are seeking more innovative methods
for debt collections.
"Finding a private/public partnership where dollars do not necessarily
have to be found up front then I wouldn't be surprised to find legislatures
willing to consider this approach even more so than they have in the past,"
Change is a Constant
But technology is not the only answer. Business processes are examined,
and "significant changes" are often in store, LaFaver said.
That was an important component for Hawaii, whose contract with AMS
included "organizational development and change management," said Marie
Okamura, director of the state taxation department.
Hawaii, emerging from a prolonged economic slump, was attracted to the
AMS model because the state didn't have the funds to pay for something upfront,
Okamura said. The state, which collects 14 different taxes, not only wanted
to integrate its two major processing systems — business and income tax
— but also automate a back-end system that had been largely manual.
Following a competitive bidding process, Hawaii selected AMS in 1997,
signed a contract in August 1999 and started developing a long-term collection
strategy, including a review of policies and procedures. Okamura said all
levels of management and staff participated in developing the strategy,
and quarterly meetings are held to address issues.
Accounts receivable was the first area the department looked at as a
means of financing the contract, she said. It would also serve as an "early
win" for the department as proof to the staff that automating manual activities
would benefit them, Okamura said.
"In any event, there was a lot of frustration in the delinquent collection
area," she said. "Delinquent accounts receivable kept on rising throughout
LaFaver said most states share the same frustration: taxpayers who have
filed a return but have not paid their taxes.
"Our experience is that the largest single area of revenue that is not
being collected in an array of states has to do with the collection or administration
of accounts receivable," he said, adding that tax agents need to send letters,
make phone calls or pay visits to those taxpayers. In the four states, he
said revenues increased in this area after a few short months.
AMS also helps states enhance their audits and case management as well
as find those who have not registered as taxpayers, he said. However, the
lag time in collecting revenues after improvements are made in those areas
could take a year or two, he said.
So far, Hawaii has implemented an automated system for billing and collecting
business taxes, and officials plan to implement an income tax processing
system later this year. They hope to integrate both systems by spring 2004,
In the past 25 months, the state has collected $71 million, she said.
Had the state not decided to focus on revamping the way it collects owed
taxes, "the state may have been in a worse financial position," she said.
Customer service also has improved with the changes. Before, delinquent
notices could take six to eight weeks to be mailed out, with interest accruing.
The new system spits out notices much quicker, and taxpayers have taken
notice, she said. Her staff is able to answer taxpayer inquiries faster
and more efficiently because information is more readily accessible.
Among "the business community as well as the legislature, they just
feel better overall that people are not getting a free ride," Okamura said,
and "that people are getting closer to paying their fair share."