Originally Published: October 6, 2016 5:45 a.m.
PHOENIX – Arizona has laid off staffers who audit corporate tax returns, a move a former Department of Revenue official said could cost the state up to $100 million a year in lost income.
Georganna Meyer, who had been the agency’s chief economist, said there normally are 30 corporate auditors. “They now have four,” Meyer said.
“There basically is no longer any corporate activity at the Department of Revenue,” she told members of the state’s Finance Advisory Committee on which she serves. “That’s going to have a significant impact on any enforcement revenues we’ve seen in the past.”
Pressed later to put a figure on that, Meyer pegged the potential loss at between $50 million and $100 million.
That is doubly significant because corporations already are paying less now than they did last year, and less last year than the year before that. And that trend is going to continue for several years as a series of significant corporate tax cuts enacted years ago by the Republican-controlled legislature take effect.
Put in real numbers, staffers of the Joint Legislative Budget Committee said if the tax laws were left untouched, corporations would have paid a total of about $549 million in 2020. But the cuts will trim that to just $281 million.
And that is presuming corporations pay all that they owe – a question brought into sharp focus by Meyer’s disclosure.
All this comes as legislative budget staffers said the tax collections they are expecting this coming year will leave less than $200 million to divide up between new and expanded programs and for any tax cuts that Gov. Doug Ducey and lawmakers want to enact.
There are potential political implications for who gets – and who does not get – those dollars.
Voters approved Proposition 123 earlier this year, which will generate an estimated $300 million a year for the coming decade. But that figure is less than what the schools would have received had lawmakers not ignored a voter-mandated requirement to boost funding annually for inflation.
Ducey, in pushing the measure, said that funding would be “just the first step.” But the governor has yet to propose any new dollars beyond that despite his promise.
Then there’s the question of higher education. Universities got an additional $32 million this year, partly restoring the $99 million taken from them the prior year.
But $19 million of that was one-time funding. If that is not restored, the three universities actually would lose $15 million this coming year even with enrollment growth.
Governor’s spokesman Daniel Scarpinato said his boss has a commitment to higher education but said it’s premature to discuss what the governor will recommend in university funding.
But he would not rule out the possibility that universities will get less going forward.
On the revenue side, Scarpinato brushed aside the sharp drop in the number of corporate auditors. He said state revenues and tax collections are up.
Department of Revenue spokesman Sean Laux backed that up, saying corporate audit collections this past year were 200 percent higher than projected.
But Laux acknowledged those figures predate the June 30 layoffs of about 50 employees overall after the agency’s budget was cut by $7 million. Those cuts left the department with one corporate audit supervisor and four corporate auditors.
Still, he said fewer auditors checking out tax returns does not necessarily mean that less money will be collected.
“We have better tools now,” Laux said.
“There is data analytics, there is software that exists that make us a lot more efficient than we used to be,” he continued. “So it makes the process of identifying and conducting audits a lot more streamlined than it used to be.”
Meyer said it’s not that simple.
“Corporate auditing is hard,” she said said. “It’s very difficult and complicated.”
She said that’s why there need to be trained people there to keep an eye on the more than 50,000 corporations in the state. More to the point, Meyer said if there are not trained auditors -- and not enough of them -- her experience tells her that companies will cheat.
“I worked for the Department of Revenue for 30 years,” she said.
“There’s a population out there that’s important to monitor because what they can get away with, they will,” Meyer explained. “It’s human nature, right?”
She said it’s not just that auditors catch corporations when they don’t properly report income and expenses. Meyer said just the presence of auditors -- and the threat of an audit -- is often enough to keep companies from getting too creative with their finances.
The disclosure of the fewer auditors -- and the possibility of reduced collections -- comes as the panel of economists predicted state revenues will grow this coming fiscal year by about 4 percent. That should result in collections of $9.66 billion, the first time it has been that high since the bottom dropped out of the state and national economy in 2007.
The actual growth rate, however, is actually likely to be closer to 2 percent, with the big difference being those previously enacted corporate tax cuts.
In 2013 corporations were paying a tax rate of close to 7 percent. This coming year it’s set to hit 4.9 percent.
But that’s not all. Lawmakers also created a new way for multi-state corporations to compute how much of their income is attributable to -- and can be taxed by -- Arizona. That change provides a big benefit to firms that send what they make here to other states and countries.