A Republican state senator says he’s concerned about a sudden drop in corporate tax collections at the Arizona Department of Revenue.
Revenue from corporate audits have hovered around $150 million annually for several years, but then dropped to $80 million in the fiscal year 2017, according to department statistics.
“There is clearly a yellow flag here. And this will be scrutinized very closely when we get back and discuss next year’s budget,” said Arizona State Sen. John Kavanagh (R), a member of the Arizona Senate Finance Committee.
A change in tax enforcement strategy that puts less pressure on businesses may be at least partly to blame. During Gov. Doug Ducey’s tenure, the department has shifted resources away from human auditors to new technology and community outreach. Since 2015, about 40 positions from the audit and collections area have been cut, including four corporate audit positions.
“They tried a different tactic,” Kavanagh said. “They thought that education instead of the hammer might work. Apparently it doesn’t appear to be working, at least not as well as they expected.”
A spokesperson for the Department of Revenue says about 25 laid-off positions have been brought back this year and the agency continues to fill vacant positions. The department currently has six corporate auditors and is in the process of hiring more employees with corporate auditing experience.
“History shows staffing levels are not the only barometer of audit performance,” Department of Revenue spokesman Ed Greenberg said in a written statement. “Regarding Corporate Audit, it is a complex area involving extensive tax portfolios, as well as the pool of corporate tax revenue has been shrinking due to enacted tax reforms.”
Greenberg told 12 News the future of audit selection is moving away from traditional approaches and into more “sophisticated analytic processes.” The moves are geared towards “front-end auditing techniques and compliance activities with taxpayers,” he said.
Ducey told 12 News last week the focus should not be on the number of corporate auditors. Rather, he said, the focus should be on the department’s use of new technology to streamline government to make it more efficient.
“I don’t think the decline you’re pointing to in terms of auditors matches up with the decline in revenues,” Ducey said. “I think that we’ll have the revenue collection that is due to the state of Arizona at the completion of the year.”
But last year, the former chief economist at the Department of Revenue warned that the number of corporate auditors would have a direct impact on collections. Georganna Meyer, now a senior economist with the Maguire Co., said during a legislative briefing there would be a decline in audit collections of up to $100 million because, she said, there were just four corporate auditors on staff at the time compared to a “historic average” of 30.
“There basically is no longer any corporate audit activity at the Department of Revenue and that is going to have a significant impact on any enforcement revenues,” said Meyer in October 2016.
A spokesperson for Gov. Ducey said the theory that fewer corporate tax auditors would result in less corporate tax revenue is “not based on facts, data, or historical trends.”
However, according to a recent report by The Arizona Republic, one long-term study of state tax data found that for every dollar spent on auditing, agencies got back between $8 and $11 in collections.
“We are working smarter. Total revenue collected per auditor is higher than in previous years,” said Patrick Ptak, senior press secretary for Gov. Ducey in an email to 12 News.
Ptak said there are other factors contributing to lower corporate tax collections in 2017. He cited studies showing state tax collections are down across the country and state corporate income tax revenue is down during the second half of 2016. Arizona is also in the third year of a four-year phase-in of corporate income tax cuts.
A leading Democrat at the legislature accused the governor of creating an atmosphere that sends a message to business owners they can get away with not paying their fair share. He said there should be a renewed effort to hire many more corporate auditors.
“It’s a little flabbergasting to me that this governor, who keeps saying we just don’t have money for teacher raises, would then make the decision to cut corporate tax auditors in the revenue department,” said Arizona State Sen. Steve Farley (D), also a member of the senate finance committee. “Why would you fire people who are trying to uphold the law and collect taxes that are already owed from people who are cheating?”
Ptak said the governor “absolutely” believes the tax code needs to be followed.
“We’ve made a lot of reforms to ensure it’s fair, and all bad actors should be held accountable,” Ptak said.