Thursday, April 9, 2009

Taxing Time

According to the Post-Gazette, federal tax returns filed by internet are processed in one day instead of 4 weeks. Talk about efficient. You can file your state taxes by internet or even by phone (if your return is easy). Yet, here in Pittsburgh, the city is in the taxes stone age. We can submit questions to mayoral debates by youtube and coming soon, we'll be watching city council meetings on the web, but to file our taxes and make estimated payments, we're limited to paper filing. Personally, I filed my state and federal taxes a month ago (before I left for Peru) and I got nearly instant notification that my returns were processed. I'm still waiting for a potential response from the city of Pittsburgh. I mailed the check and many forms and crossed my fingers.

With all the talk about efficiency and modernization in this city, how about an online filing of city taxes? I know all the information makes its way into a computer eventually (or should). Let's cut out the middle man who has to type it all in. The federal government has realized the cost savings of electronic filing and we should, too. "... e-filing also helps to hold down government costs. It costs the IRS $2.80 to process a paper return vs. 35 cents to process an electronic return." That ends up to being less than the cost of the stamp you'd use to mail in your return. Assuming the costs are similar and our more than 300,000 residents file taxes each year, then that works out to a potential yearly savings of $735,000 (300,000 times $2.45) . Even if only half of city residents file taxes, I could write the software for a lot less than that and give it away for free. I'm waiting for the day that consulting job pops up on the city of Pittsburgh's website, but I won't be holding my breath.


EdHeath said...

Too late, the City already has limited web based filing. You have to used the identifying PIN number that is in the booklet the City sends to people who have filed taxes with them before. Also you can't owe the City money and you can't be getting a refund from the City. But otherwise it is very straight forward and easy.

Right now I do not believe the City gets electronic copies of W-2’s the way the Feds and the States do. That is one of the critical components of electronic filing, I believe. Still, the City must get a fair amount of information in the taxes that are with held for them (such as who the taxes are for in name and social security number). The City does scan tax forms, as I understand it, but I doubt they use OCR software (especially since they do *not* offer a pdf with fields you can type into on line, something that would make filling their taxes much easier for those of us with computers). So the City is trying, but they do make funny assumptions, like that every citizen has access to a copier, while not believing every citizen has access to an internet connected computer.

We should require Comcast and Verizon to have all our cable or FIOS connected computers to have a means of filling our City taxes. Give everyone a cheesy keyboard and crappy screen graphics, like the French Minitel.

illyrias said...

Yes, Ed, now that you mention it, I do remember that if you owed less than $1.00 you could file online or some silliness like that.

I'm self-employed and do not have taxes withdrawn automatically, so I know that will never apply to me. I'll never be able to guess my taxes that closely. But I wonder how many people that actually works out for. And what percentage of users are able to file online (and actually do). My off-the-top guess? Less than 5% of city tax payers use the online filing, but that is a wild guess. If it's anywhere in that vicinity, clearly, what's currently in place is a worthless waste of money.

EdHeath said...

Honestly, Illyrias, I don't know how many Pittsburghers use the online filing system. On the one hand, the City tax structure for income taxes is pretty simple, 3% of your wages or profits. On the other hand, If you have unreimbursed business expenses (notably union dues), that probably is enough to disqualify you. And A lot of companies, based in Pittsburgh or elsewhere in the country, simple do not take money out for Pittsburgh, or (less common) take out the wrong amount. Maybe when the tax season is over I can find out what the percentage of Pittsburghers who file taxes use the online system (or maybe Chris Briem knows).

I think the limitation for you filing online with Pittsburgh is the need to file a Pennsylvania schedule C-F form. Obviously you can pay taxes quarterly, so that when you do file you Pgh40 you owe little or no tax. But until the Pittsburgh online system accepts attachments, you would have trouble with your supporting documentation.

I read an article or opinion piece early in the tax season in which a famous economist (I believe) suggested having the IRS take all the W-2’s and 1099’s (INT, student loan, stocks, etc) and 1098’s (education and mortgage, I think) and fill out a tax form for you and send it to you. If you disagree, like if you have charitable contributions or child care expenses to add, you would use their form to fill out your expanded form and send it in. If you agree with their form, you could just sign it and send it in. That way a lot of the little things that people do that take up time at the IRS, like forgetting to include their bank interest on their forms, would go away. The IRS has the capability now to do this, there just needs to be the political will (to get past the H&R Block lobby) to do it.

Steven Bone said...

Lets assume that an online system could be created that works for 100% of the people - full form capabilities, no copies required, and e-payment options. Of 300,000 potential users, how many _could_ use it? That means people would need to know it is available and believe it is easier, more reliable, and more secure than the paper based system. They would need access to the internet that is private and from their home PC (inputing tax data at the library would not be my cup of tea). It is unlikely that any tax professional preparing the return would use the online filing option. I don't know how many potential users that eliminates but lets say half. The development/testing/securing of a web based system could easily cost well over $200k, plus the computers, the folks to run/maintain them, technical support folks, and back office people to deal with issues such as how a person could amend a return, etc. Plus you still need to deal with the paper returns! The cost of doing this electronically would easily outstrip the cost of doing this via paper.

An alternative: Privatize. Many small communities that use a private company to collect income taxes have fully electronic filing, payment, and better taxpayer compliance than the city does. These private companies specialize in this, do it all year long, and have so many taxpayer-clients across their client communities that they are able to use volume to make the costs described above achieve overall cost-savings for all their client taxing agencies - just like the feds did.

EdHeath said...

Well, I think the City would be wise to hire a software firm to further develop their online system, and I suspect there are firms out there that specialize in developing online tax filing services for small, medium or large cities. I also suspect that a tax system like Pittsburgh’s would be too large for a Pennsylvania Municipal Tax Services or a Berkheimer Associates. PAMS and Berkheimer can take advantage of economies of scale when adding a Shaler or Braddock to their tax collection services, but Pittsburgh has a larger and more complicated tax collection structure, which would force the tax collection agency to hire full time employees just for Pittsburgh. No economies of scale in taking the Pittsburgh contract, just a fairly steep learning curve. Meanwhile, Pittsburgh already has Finance Department employees familiar with the system and many of the clients.

As for whether the online system would be used, even the IRS does not let everyone use their online system. People who need to show that they have allowed their ex-spouse to have the tax benefits for a child for this year have to mail in their taxes with the signed form that allows this. But you bring up a point. The IRS and State encourage e-filing by processing your taxes more quickly (since you have done the heavy lifting of data entry). So you get any refund you are entitled to more quickly (even more quickly if you agree to allow the IRS/State to direct deposit your refund). The City could do something similar in giving anyone who e-files next year a buck’s credit, which could be your entire refund, add to a refund or count against what you might owe (only if you do direct deposit or direct debit, of course).

You don’t think tax professionals would use the online system? Why would that be the case? Tax professionals want to show they are worth their fees, so they want to get you as much money as fast as possible. They also want to know if there are any problems as quickly as possible, to deal with them. E-filing is the manner in which you do that.

Privatizing is not a panacea (or do you think that we are getting a good deal out of being the only industrialized country with a privately run health care system). But I do agree that government entities ought to consider the use of market mechanisms wherever possible. They can be and have been very effective in managing pollution in this country for example.