An idea spawned over 30 years ago
Back in the late 1970s, I was a college student with a part-time job programming accounting software. One of my assignments was to write routines to calculate state income tax withholding for a payroll system.
For each state I had to read the personal income tax law and incorporate the withholding tables into the calculations. It was an interesting exercise for a young person to see the wide variations in state income tax law.
There were several states with no income tax, which currently number seven. I quickly checked these off as “Complete.” All the rest, spare one, were variations on a theme: Take the employee’s gross pay, look up the base rate from the appropriate chart, and apply adjustments for those states that had progressive income tax rates.
The one exception to this routine was
Arizona. Their state income tax withholding was simply 10% of the federal amount. One line of programming code and I was done.
The connection to fraud, waste and abuse
Elected officials often hear stories about people gaming the system, government employees being inefficient or worse, and unscrupulous opportunists abusing workplace and hiring rules, the pension system, and more.
An anecdote can be a useful entrĂ©e into investigating fraud, waste and abuse—the proverbial tip of the iceberg, if you will—but we need resources to confirm if the alleged fraud, waste and/or abuse exists and more resources to root out how it happened and if a systemic issue needs to be addressed.
As an auditor, I learned long ago that independence and healthy skepticism is necessary to effectively assess and address a problem situation, something that insiders cannot bring to the table.
The state does have an auditor, of course, but my idea is to create or expand an existing tactical audit team aimed exclusively at ferreting out fraud, waste and abuse.
How do we do this without increasing the state’s headcount?
The answer is to free up scores of employees at the Department of Revenue (DOR) who are focused on monitoring, auditing and collecting personal income taxes. With additional training in state-of-the-art auditing techniques, this group can be the resource we need to go after the big bucks.
The key to redirecting our resources from personal income tax auditing to fraud, waste and abuse (FW&A) audits is to simplify the commonwealth’s personal income tax calculation by passing the Personal Income Tax Simplification Act (PITS Act).
I propose that, in its simplest terms, we take federal taxable income and multiply that by a percentage to arrive at state income tax.
Say that the rate turns out to be 5% in order to make this system revenue neutral. If your federal taxable income is $50,000, your state income tax would be $2,500.
You could write the calculation on a postage stamp. And the need to audit this calculation would vanish. A computer would recalculate 100% of the tax returns.
And here’s the part of this plan that brings a smile to my face. If the DOR suspects that someone is not properly reporting income or deductions, there is no need to send out the audit team. Instead, the DOR notifies the IRS and lets them spend the time and money to perform the audit.
An unfunded mandate put onto the federal government by a state. Sweet.
It’s not really that simple, is it?
For the majority of taxpayers, it really is that simple. Multiply federal taxable income by the state income tax percentage and you’re done.
There are a relatively few exceptions, of course.
Here they are:
The federal taxable income figure would need to be adjusted by taxpayers who have the following situations:
Add back deduction for taxes paid from Schedule A (Itemized Deductions)
Add back non-Massachusetts tax exempt interest and dividends (out-of-state muni bonds)
Add back self-employment tax deduction
Add back net operating loss carryforward (a rare situation)
Subtract Massachusetts income tax refund included in federal income
Subtract taxable portion of social security benefits
Subtract nontaxable federal, state and local pension income
Subtract U.S. government obligations interest income
I created a simple Excel spreadsheet to accommodate for these exceptions and it took me less than two minutes per tax return to locate these numbers on the federal return and enter them into the PITS calculation.
Can you calculate your state income tax now in two minutes or less? Is your child 12 or 13? It makes a difference.
Other considerations relative to the PITS Act
For those who support the idea of simplifying our state’s personal income taxation rules—the governor made reference to such in his recent inaugural speech—but support the concept of individual exemptions, deductions for mortgage interest and charitable giving, PITS makes all this possible.
Income tax credits are subtracted from the amount a taxpayer owes, therefore, the legislature can still offer credits to incent certain activities or provide relief for certain taxpayers without complicating the PITS calculation. The septic system installation credit, senior circuit breaker credit, and earned income tax credit, for example, can all be maintained under the PITS system.
Proposed implementation
A change of this magnitude cannot be made without an extensive study of the effects of such a law and amendments to other laws that would be necessary to implement PITS. I propose forming a commission to take on this task, which would include the Commissioner of Administration, the Commissioner of Revenue, the Senate and House Chairs on Revenue, the Senate and House minority leaders, select legislators, and several non-government representatives, such as tax attorneys, CPAs, and representatives from the several nonprofit public policy institutes.
The objective would be to line up our ducks to allow the PITS Act to be filed for the 2013-2014 legislative session.
Back to fraud, waste and abuse
Although personal income tax simplification is a laudable goal in and of itself, we can make this effort pay even greater dividends by applying the freed up human resources to attacking the FW&A that we all know exists.
I have no qualms with the missions of the many state agencies, departments and “quasis,” but if we were successful at identifying cost savings of just one percent through consolidation and elimination of FW&A, the effort would be well worthwhile.
One percent of the
Health and
Human Services budget is $153 million, for example. If we could save this amount without reducing service levels and without cutting programs, but rather by eliminating fraudulent recipients of benefits and eliminating wasteful and abusive practices, we would produce a less costly and more sustainable state government.
Conclusion
Lawmakers may take a first glance at PITS and conclude that it’s too simple or that there isn’t enough fraud, waste and abuse in the system to warrant chasing after it.
I would remind my fellow legislators of Occam’s razor. Father William of Ockham wrote the following in 14th century: “Entities must not be multiplied beyond necessity.”
We passed that stage long ago and need to return to a simpler, more effective model.