How Mississippi turned $3.5 million into $80 million

September 5, 2013

(Credit: Daniel Acker/Bloomberg)

By virtually any standard, a nearly 23-fold return on an investment in a year is really good. It’s so good, in fact, that it’s almost unbelievable. But in Mississippi that’s exactly what legislators got.

When appropriators there gave the state’s tax-collection agency an extra $3.5 million in funding for the fiscal year that ended in June, they asked that the agency aim to collect $10 million more in back taxes than it had the year before. The agency, the Mississippi Department of Revenue, said it would try and ultimately achieved the goal. Eight times. The state collected $190.3 million in back taxes last fiscal year, an $80.9 million increase over the year before, playing a role in what turned out to be a surprisingly large overall haul.

“We had a little over 5 percent growth in tax revenues [last fiscal year]. We had anticipated about a half-a-percent,” said Herb Frierson, the Republican chairman of the state House Appropriations committee. “We upped that twice during the year, but we still way exceeded our highest expectation.”

The $3.5 million in extra funding, which went to paying for 44 new auditors and collection agents, wasn’t the only driver of revenue growth, Frierson said. An improved state economy and the so-called ‘April Surprise’—the selling of assets late last year in anticipation of higher federal tax rates this year—played key roles. But the ability to better collect back taxes certainly helped.

Securing the $3.5 million in extra funding wasn’t easy, though, Frierson said.

“It was just a hard sell among the leadership,” he said. Eventually, though, he and his Senate counterpart were able to get other legislators on board.

Some of the extra $80.9 million will go to cities and towns where sales taxes were collected, but much of it will go into Mississippi’s general fund, which has suffered from a weak recovery.

Earlier this year, the resource group the National Conference of State Legislatures reported that only half the states expected to end the 2013 fiscal year with at least as much revenue as they hauled in FY2008, “while many others do not expect a return for at least three years or longer.” And, even then, those estimates don’t take into account inflation, spending growth, population increases and tax changes.

State revenues rose in the first quarter of this year, according to an August report from The Nelson A. Rockefeller Institute of Government at the State University of New York. But that same report also noted that “the revenue recovery remains weak by historical standards, and service demands are far higher than they were five years ago.”

Mississippi offers just one example of the low-cost ways cash-strapped states can replenish general funds, says Michael Mazerov, a senior fellow with the Center on Budget and Policy Priority’s State Fiscal Project.

“There’s just no question that the tax gap is so big that making some small investments has a very good rate of return,” he said.

And audits, in particular, are effective. The Internal Revenue Service’s limited, focused exams of federal tax filings—known as correspondence exams—can yield a $7 return for every dollar spent, the Government Accountability Office found in a December report. Even more complex face-to-face investigations yielded a return of $1.8 for every dollar spent.

Niraj Chokshi reports for GovBeat, The Post's state and local policy blog.
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Niraj Chokshi · September 5, 2013