Debate over online state tax filing heats up in Capitol

There’s no bill yet, but an attempt by Intuit and others to dismantle the state’s free online tax-filing system is back before the Legislature – again. The expectation is that a version of the earlier proposal will come before lawmakers in the final days of the session – again.

The financial stakes are significant, although just how significant is uncertain. By one  estimate, perhaps $1.2 billion is left on the table because the state’s existing systems fail to capture revenue.

Intuit, which manufacturers the popular TurboTax program, and others in a business coalition want to curtail the use of free, state-sponsored online tax filing systems. There are two of them. One is Ready Return, a basic, one-step process for taxpayers who use the standard deduction, don’t itemize and only have wage income from one W-2 source. The other is CalFile, which allows itemized deductions and income up to $321,000 for married filing jointly, but is not suitable for some taxpayers, such as those with extensive investment income or business deductions.

State tax officials, led by Controller John Chiang, say CalFile and Ready Return save the state money and expedite taxpayers’ returns.

For the 2009 tax year, about 58,000 taxpayers filed through Ready Return and some 235,000 used CalFile, according to Franchise Tax Board spokeswoman Brenda Voet. The FTB says about 2 million taxpayers are eligible to use Ready Return, and more than three times as many – 6.4 million – can use Cal File if they choose.

For Intuit and its supporters, however, there are basic problems with the state’s filing systems.

One concern is that online-filing taxpayers may find it harder to pry legitimate refunds from the strapped state, another is that the systems’ ability to calculate deductions is limited. Lower income filers, especially, may be unable to take advantage of the Earned Income Tax Credit, and some may be fearful of providing information to a state agency. There is the issue of the state engaging in an operation that directly competes with private enterprise, and then there is the question of appeals: Can a taxpayer reasonably expect that the same agency that computes the taxes – and collects them – is able to fairly consider objections to potential errors and return overpayments?

In no other system, noted Intuit spokeswoman Whitney MacDougall, “are you allowed to be both the preparer and the auditor.”

“You’re still left with this conflict of interest question at the end, and that’s a real fair question,” added Intuit lobbyist Barry Broad.

A coalition of companies, including Intuit, would like the state to join the online Free File system, in which 21 states and the federal government already participate. The system handles both federal and state returns. Under Free File, filers choose from a number of tax-preparation software programs – including TurboTax. Unlike Ready Return, the Free File system handles both state and federal returns.

The Free File system, financed by private companies, removes the government from direct competition with tax-preparation companies.

But Chiang, who signs the state’s checks, says the free online tax filing systems are “public service at its best” and says it provides efficiency and convenience. 

Eliminating the free filing systems “is a terrible idea for taxpayers. The issue is more about politics. It’s not about policy,” Chiang said. Ready Return and CalFile “are in use now, they are incredibly popular, they are very efficient and they reduce errors.”

Chiang noted that private tax preparers  have sought dismantling Ready Return for several years, since the establishment of the online pilot program. Chiang spokesman Jacob Roper added that “the state saves a tremendous amount with people who use online filing. A digital return costs 34 cents to process, as opposed to $2.59 for a paper return.”

Estimates vary, but the FTB believes Ready Return and CalFile save taxpayers between $4 million and $10 million, while the state saves some $500,000 annually in overhead and administrative costs.

The latest Intuit-backed proposal, still a work in progress, is similar to last year’s, but adds a provision to fill out forms online. Also different is the timing: Last year, Intuit was thrust into the Capitol spotlight because of a partisan political fight; thus far, that hasn’t developed.

Intuit and its representatives also have met with the Capitol leaders to ease the path of their proposal.

But like last year, the debate over the plan is all but certain to intensify toward the end of the session. The proposal is likely to be placed into a budget trailer bill and debated by the two-house budget conference committee, a strategic move supporters hope will help its passage and debated at the two-house budget conference committee.

The roughly two dozen measures that accompany the state budget bill contain the deals that enable the budget agreement to be reached.

Slipping the agreement into a trailer bill is part of the strategic approach of the bill’s backers, since trailers are joined to the budget bill, are part of the budget agreement and are voted up or down along with the main budget.

But the down side is that linking the measure to the budget means the proposal’s fate is uncertain at best. The 2009-10 legislative session officially ends at midnight on Aug. 31, although if no budget is in place by then – which seems increasingly likely – lawmakers could be called back into special session, which could drag on for weeks, or longer. Schwarzenegger already has suggested he’d be willing to let the tardy budget roll over to the new governor.

Intuit is a veteran of the Capitol’s political wars. 

During the past decade, Intuit has spent about $2 million to lobby lawmakers and has been active in making political donations. Its single largest donation, according to state financial disclosure records, was $100,000 to the “Dream Team” coalition backed by Schwarzenegger.