From data mining to predictive modeling techniques, information technology is an increasingly important tool for state governments that want to improve their tax handling performance by speeding tax processing and boosting tax collections. Such technologies are components of a financial enterprise in which one tax application links to another to produce an overview of individual portfolios.

Tax system modernization could help states cut costs and emerge from years of tight budgets, analysts say.

Spending on tax system technologies will grow from $325 million in fiscal 2005 to about $450 million in fiscal 2009, according to a report released in November 2005 by James Krouse, a state and local government market analyst at Input, a market research firm based in Reston, Va. “The market, however, is poised to grow even more considerably if continued trends in the advancement of integrated tax and accounting systems, electronic tax filing, automated collection, and delinquency/recovery initiatives continue as reported,” Krouse wrote.

As states accrue financial benefits via modernized tax systems, experts add that the new investments will help state tax agencies become more customer-friendly, electronically progressive organizations instead of paper-processing factories.

Public and business taxpayers are driving such efforts. “The citizen wants to interact — at least to the extent they want to interact with the government and a tax agency — they want to interact electronically,” said Harley Duncan, executive director of the Federation of Tax Administrators, a national membership association composed of the principal state tax collection agencies.

Electronic filing skyrockets
Electronic tax filing has grown dramatically during the past few years as state tax administrators strive for quicker processing, improved accuracy and better uses of agency resources. To promote e-filing, states offer incentives such as quicker refunds, free tax preparation software and direct deposits of returns.

The strategy seems to be working. Recent statistics from the Federation of Tax Administrators show that in 40 states and Washington, D.C., 47.9 million people electronically filed individual income tax returns in 2005, about 16 percent more than in 2004. During the same period, paper returns decreased by 8 percent and TeleFile returns declined by 17 percent. Overall, nonpaper filing accounts for 48 percent of all individual income tax returns filed.

Karla Pierce, executive director of Microsoft’s tax and revenue public-sector unit, said that in addition to improving customer service, e-filing has helped agency employees shift their focus from processing returns to high-priority tasks, such as finding delinquent taxpayers.