House Considers Bill To Increase States' Revenue-Raising Powers

by Mike Godfrey, Tax-News.com, Washington

12 May 2009

A bill has been introduced in the House of Representatives to assist State governments in the collection of delinquent income taxes.

The State Tax Administration Assistance Act of 2009, introduced by Rep. John Lewis, Chairman of the Ways and Means Oversight Subcommittee, would remove the ‘same-state’ requirement from a federal program and allow state governments to collect unpaid state income taxes from non-residents.

Currently, States can offset federal income tax refunds for delinquent state income taxes only if a taxpayer resides in the State seeking the offset.

Forty States and the District of Columbia participate in the refund offset program. In fiscal year 2008, States collected more than USD380m in delinquent state income tax debt through the scheme. A total in excess of USD5bn was deducted from income tax refunds and used instead to pay other federal agency non-tax debt, State income tax debt, and overdue child support payments in calendar year 2008.

“The Committee has been asked over and over again to expand the federal refund offset program in a variety of ways,” said Lewis.

However, the Georgia Democrat cautioned that any expansion of the program “must be balanced against taxpayer privacy concerns, administrative burdens, and the effect on voluntary taxpayer compliance.”

Lewis introduced the bill in response to a Government Accountability Office (GAO) report which highlights the estimated loss of revenue due to the residency requirement.

“Due in part to the current economic downturn and the financial problems of state and local governments, interest has grown in potential expansion of the refund offset program as a means to collect additional kinds of State or local debts,” the GAO said.

A report published in January by the Tax Foundation concluded that forty-five States are facing budget shortfalls of varying degrees, totaling approximately USD132bn through fiscal year 2010.

Many State governments are expected to support their budgets with additional increases in taxation and spending cuts over the coming months, as the recession cuts deep into tax revenues from State and local taxes.

The overall amount of taxes collected by the 50 States continued to fall during the fourth quarter of 2008, with State and local sales taxes — one of the largest components of State and local budgets — suffering the worst decline in half a century, according to a report published by the Rockefeller Institute of Government report on April 14.

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