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Federal Reporting Requirement for State and Local Income and Property Tax Payments

The approved House tax reform bill proposes to impose a new major information reporting requirement on state and local governments. The provision would require state and local governments to (1) send a federal return (Form 1099) to the Internal Revenue Service for each taxpayer making payments of income and property taxes to the government in excess of $10 and (2) furnish each taxpayer with a written statement showing payments received from the taxpayer. The purpose of the provision is to diminish federal tax evasion.

This late addition to the tax bill was never discussed in public hearings, no analysis was made of the ability of state and local governments to comply with the requirement in a timely fashion, no evidence was presented showing a need for the provision, and no cost-benefit analysis was made to demonstrate that the costs of the provision for states and localities exceeded the benefits to the federal government.

The Government Finance Officers Association opposes the new federal reporting requirement because of the following adverse impacts it will have on state and local tax administration and enforcement:

  1. It would impose major new compliance requirements.
  2. Some of its principal requirements are not operationally feasible because local property taxes are levied against the property not a specific individual. Therefore, social security numbers cannot be matched to specific payments. This factor would unintentionally place state and local governments in violation of federal law.
  3. Financing the requirements (cost of postage, processing and restructuring computer operations) would divert state and local funds from revenue-producing enforcement activities to expenditures that produce no state or local revenue when local government revenue has been decreased through the reduction of federal revenue sharing.
  4. Estimated federal revenue attributable to this provision is substantially less than the estimated direct and indirect costs to the state and local governments.
  5. A large part of the information state and local governments would be required to furnish the federal government and the taxpayer would have no value either in discovering unpaid taxes or in promoting accurate filing.
  6. The Internal Revenue Service has conducted studies that indicate a high degree of accuracy in taxpayers' reporting of state and local deductions.
  7. The intent of this provision can be accomplished by other means such as improving instructions on the federal tax form assisting the taxpayer in determining the amount of state and local taxes deductible in any tax year.

Adopted: June 3, 1986