RALEIGH – After the Raleigh News & Observer reported that changes in law and policy may have allowed the state of North Carolina to keep taxpayers’ money to which it was not entitled, Gov. Beverly Perdue did the right thing.
She was “incensed,” according to her press office, that some North Carolinians who had mistakenly overpaid their taxes were being penalized by a process that seemed rigged in favor of the state treasury. The Perdue administration has now assigned 80 people to work through the revenue department’s backlog of flagged taxpayer files, authorizing a refund when appropriate regardless of whether the case falls within the three-year statute of limitations.
Good for the governor. But I think she ought to go further. I don’t think the state’s flawed process for reviewing tax files was simply an accidental oversight or a bureaucratic snafu. I think it was designed to maximize revenue to the state.
You can call the strategy “aggressive cash-flow management” if you want to be diplomatic. If you’re inclined towards blunt cynicism, the term “mildly larcenous” might sound like a better fit.
North Carolina’s income-tax returns have long been reviewed by computers programmed to flag mistakes. Until recently, it was the policy of the Department of Revenue to consider a possible mistake to have been discovered when the computer flagged it, even though it would typically still be necessary for an employee to review the file before notifying the taxpayer of the error and arranging for a refund.
But in 2009, the department’s policy changed. Now, it would consider a possible mistake to have been discovered only when an employee reviewed and assessed the file.
What’s the difference? Keep in mind that there is a statute of limitations. If taxpayers didn’t request a refund during the time allotted, they weren’t legally entitled to one. How could taxpayers submit a timely request unless the department informed them of a possible problem? And what happened if the department failed to review a flagged file before the three-year window was up?
The taxpayer was out of luck.
Revenue officials denied that their change of policy was designed to increase how long the state held on to overpaid taxes. But the News & Observer obtained email correspondence within the department that suggested at least some employees considered the policy change unfair and potentially abusive. One was Nancy Pomeranz, director of the department’s personal taxes division.
“My folks were told not to process any refunds in any situation where the statute has run now because no refund is ‘discovered’ until someone actually looks at it or handles it,” Pomeranz wrote in an October email. “I do not agree and, as I mentioned in my earlier e-mail, this is contrary to our long-standing position.” Pomeranz went on to say that in her opinion the policy would harm some taxpayers who were owed refunds.
Still, the higher-ups at the Department of Revenue didn’t budge. It took a newspaper expose several months later to force a change.
I’m not going to deny that many flawed public policies persist not because of bad faith but simply because of inertia. In this case, however, Revenue officials seemed to have dismissed internal concerns about a policy that, at the very least, would be difficult to defend if made public – which it is.
Consider the context here. North Carolina’s state government had been under fiscal stress for several years. Fearing the worst, policymakers had given the Department of Revenue new tools to go after what the state considered to be tax underpayments, from both individual and corporate filers. The result was hundreds of millions of dollars in increased revenue collections, money that legislators and administration officials were delighted to receive. They hoped for more.
Is it really so difficult to believe that, given the pressure to maximize state revenue during a budget crunch, some Revenue officials thought it expedient to change the policy on overpayments in ways that would let the state hold on to taxpayers’ money longer, if not permanently?
Gov. Perdue needs to ask some tough questions of Revenue Secretary Ken Lay and his subordinates.
Hood is president of the John Locke Foundation.