The IRS had joined this “free file” public-private partnership years before, as had 20 other states. The Department of Taxation "would no longer have to spend taxpayer resources internally to maintain, upgrade and support the current iFile system,” Del. Kathy J. Byron (R.-Lynchburg) said on the floor of the House of Delegates while advocating for H.B. 1349, her bill making this change. “Taxpayers of Virginia would have the option to choose any number of tax software programs through Free File.”
Overwhelming, bipartisan majorities in the General Assembly agreed and then-Gov. Robert F. McDonnell (R) signed the bill into law. “It saves the state money, is a part of a national movement, and gives Virginians a better tax-filing service,” McDonnell spokeswoman Taylor Thornley told the Richmond Times-Dispatch at the time.
A decade later, it’s time to do the math. And the results don’t look good for the commonwealth or its citizens — only for Intuit, developer of the market-dominating app TurboTax, and its smaller competitors. More than 278,000 Virginians used iFile in 2009, according to the Department of Taxation’s 2010 analysis of Byron’s bill, but last year only 90,288 submitted state returns via Free File, according to department spokeswoman Stephanie M. Benson. That’s about 2.5 percent of the roughly 3.5 million returns sent in electronically.
“I don’t know why it would be such a modest number,” said Robert A. Weinberger, a nonresident fellow at the Urban-Brookings Tax Policy Center. He noted that some taxpayers may have used free-for-anyone entry-level apps; Intuit, for example, offers a free edition of TurboTax that only covers the federal 1040 form and state equivalents. The Department of Taxation’s site clearly lists seven Free File providers.
Finding these options can be tricky. Last year, Pro Publica documented how Intuit obscured the availability of its free-file options. Meanwhile, 687,387 taxpayers filed Virginia returns on paper last year, at an average processing cost of $3.06 each.
Weinberger said the point of this exercise for Intuit was not generating new income but getting rid of a state-funded competitor. “For Intuit, this was an existential threat,” said Weinberger (who until 2009 worked in government relations for Intuit’s rival H&R Block). “They’re willing to offer free state filing, but they want to keep it in their own backyard.” In 2009, Intuit made $25,000 in political contributions in Virginia, placing it among the smaller business donors that year. Intuit did not respond to a request for comment.
Taxpayers who used iFile but have incomes above Free File’s $69,000 limit have a no-charge and no-paper alternative to the $50 cost of state filing via Intuit’s TurboTax Deluxe: Free Fillable Forms, an Intuit-run site that implements the Virginia Form 760 and related documentation in a browser. You really have to want to use this option, though. Free Fillable Forms requires creating a new account each year, so there’s no automatic handover of last year’s data. To check what you’ll owe or get back, you must click a “Do the Math” button. Your work doesn’t gets saved until you click the “Save” button. It’s the stone tablet of spreadsheets. But because much of a Virginia return piggybacks off a federal return, there’s also not much to get wrong. The most complex part may be the “Spouse Tax Adjustment,” and even that only requires copying several numbers from a federal return.
Arguments such as “the private sector would have an incentive to find as much savings as possible for taxpayers” — what Americans for Tax Reform said in endorsing Virginia’s Free File bill in 2010 — assume there’s much more complexity in a state tax return. They also assume that should such an advantage exist, taxpayers wouldn’t decide to pay for a tax-prep app that saved money over a state-backed freebie. But in Virginia, that choice no longer exists because Intuit and its ilk persuaded the state to cede the market. Who’s left to benefit from this experiment? Other states that now have an object lesson in crony capitalism. “Virginia, in a way, is a good case study,” said Weinberger. “They had their program and then pulled it back.”