March 25, 2011 The Honorable Mike Parry Chair, State Government Innovation and Veterans Committee Minnesota Senate

309 Capitol Building Saint Paul, MN 55155-1606 Dear Senator Parry: Thank you for the opportunity for department staff to testify before your committee Wednesday evening regarding the State Government Appropriations bill (SF604). I am writing to reinforce key concerns regarding several budget and revenue provisions contained in the bill. The bill and related legislative tracking overstate general fund savings by at least $99 million for the FY 2012-13 biennium due to two provisions: • • The bill requires a 10% reduction in the department’s operating budget for FY 2012-13. This will result in an estimated loss of $67 million in general fund revenue due to the reduction in key tax compliance and support functions that would be necessary to meet this requirement. The bill overstates potential revenues from a federal debt offset proposal (Art. 3, Sec. 31) by $32.3 million. While we recognize that a complete fiscal note was only recently provided to your committee, the department estimates this program will generate $4.3 million in new revenue for the FY2012-13 biennium – rather than $36.6 million.

We also believe that additional general fund revenue losses may be incurred as a result of other provisions in SF604. The bill requires the department to reduce its staff compliment and related costs by 12% by June 30, 2013, and by 15% by June 30, 2015. Given that the legislative tracking recognizes additional budget savings beyond the 10% state agency appropriation reduction, we assume some portion of these reductions will result in additional cutbacks in existing tax compliance and compliance support functions. Over the past decade the legislature has explicitly increased department staffing levels with the intent that additional general fund revenues be generated through tax compliance efforts. Those expectations have been met. While the department understands the committee’s desire to protect direct-compliance activities, it is impossible to avoid a loss of tax revenue by now reversing appropriations and staffing levels by the magnitude proposed in SF604. Further, the department’s “compliance-support” staff is already at the bare minimum needed to adequately serve taxpayers and direct-compliance activities. Support activities historically comprised roughly half of the department’s budget. Since 2002, this share has shrunk to 30% due to budget reductions, support staff cuts and a series of compliance initiatives that required additional audit and collections staff. Compliance-support activities are mission-critical – not discretionary. They enable front-line collectors, auditors and processes that are vital to maximizing voluntary compliance, and provide research to inform policy decisions. Voluntary compliance – a key attribute of our revenue system – will decline without adequate support. Key support functions include: processing tax returns, payments and refunds; hearing tax appeals; designing forms and instructions; tax receipt reporting activities; website informational and maintenance services; oversight of property tax data; and maintenance of electronic filing, paying, auditing, collection and taxpayer account systems.
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The across-the-board operating reductions in this bill would have the following impacts on these crucial support functions: • • • • • • significant delays in processing tax returns, refunds and appeals; significant reductions in the agency’s ability to maintain its systems, and the consequent risk of taxpayer disruption; loss of seasoned tax research staff that provides tax data, revenue estimates, and key publications on which the governor and the legislature depend; reductions in website and forms design resources, on which taxpayers are increasingly dependent; reductions in property tax oversight, growing inequities in valuations and errors and delays in the distribution of state aids to local government; and reduction in taxpayer services with closures of a number of DOR offices throughout Minnesota.

The department welcomes the committee’s help in providing more compliance tools, such as data analytics tools referenced in the bill (Art. 3, Sec. 47). The bill and supporting recommendations assume a savings of $140 million through improved efficiency of certain state operations based on vendor-driven business tools. While we are not opposed to vendor-driven tools per se, we have the following concerns with this section: • • We believe this estimate is unrealistically high based on our understanding that Revenue would be expected to realize $131 million of the projected savings through more efficient tax fraud prevention and detection. The department has not been approached by, nor met with, any vendor to discuss – even at a high level – the underlying assumptions of any proposal to realize these savings. As a result, we have no information about what such a product would cost or what level of financial or personnel resources the agency would need to implement such a proposal. Historically, we often find that business services vendors are not aware of the department’s current practices and the extent to which the tools they offer supplement or duplicate our practices. In some cases, we have found after analysis that 85% or more of the revenue a vendor is proposing to realize is already being collected by the department. Experiences in other states may not be a reliable predictor of how a given tool or process would work in Minnesota; states differ as to how, and to what degree, they utilize data analytics tools. Furthermore, basing a contract for this type of business services on cost-savings potential is quite likely to cost more in the long-run than if purchased through a direct appropriation since the vendor bears more risk.

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The Department of Revenue is always eager to help Minnesota and its taxpayers in difficult financial times. We welcome any opportunity to discuss with you further how that can be accomplished. Sincerely,

Daniel A. Salomone Acting Commissioner

Cc:

Governor Mark Dayton Members of the Minnesota Senate

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