Since the last Balanced Budget Update, there has been some public discussion about the City of Lakewood's Income Taxes, and the impact of leaving the Regional Income Tax Agency (RITA) on November 1, 2005, and the following is a discussion comparing Lakewood's In house collections to that of RITA.
It is important to note the ratio of income tax related expenditures to actual income tax collections was at a high of 4.77% in 2003 (with RITA) to a low of 3.2% in 2007 (In house). This ratio has been at or below 3.5% since leaving RITA, where the ratio was historically above 4%.
Here is the 2007 estimate of costs if Lakewood remained with RITA:
RITA Standard Services*: $434,506
Outside Law Firm: $ 55,428
Lakewood Staff: $167,000
Total RITA Estimate: $656,934
*does not include researching fees, small claims / civil complaints, and filing of subpoenas
City of Lakewood In House Collections Total Costs in 2007: $572,192 - a savings of nearly $85,000
The City of Lakewood's Income Tax software contains a database of the entire city that identifies each address and classifying it as an owner-occupied or rental property in order to track residents, businesses and property owners. It also tracks if a return was filed from that address, which effectively identifies non-filers that the Income Tax Division aggressively pursues.
To our knowledge, RITA has been in the process of updating its computer system for several years, and is still using an outdated server that could not provide and track a database of Lakewood addresses like the one the City has been using since leaving RITA.
RITA currently has 158 members with a total population served of over 1.5 million. They have stated "the expansion in membership means RITA's operating costs are shared by an even larger group - thus each members' share is reduced."
This was not the experience of Lakewood as a member of RITA as it saw its ratio of expenditures to collections increase over time. Also, with a rental base of nearly 50% of its residents, the City of Lakewood believes stringent maintenance and analysis of its taxpayer database is the key to revenue growth.
The City of Lakewood is in the process of finalizing an agreement with the City of Cleveland this summer for Internal Revenue Service (IRS) data sharing. Cleveland has had IRS data for several years, and Lakewood will be in a position this year to access IRS data prior to RITA being able to complete IRS audits for its members and begin to implement its IRS data share system.
It was the City of Lakewood's experience that RITA did not fully utilize its taxpayer information. For example, Lakewood found that data share information received from the State of Ohio Division of Taxation was used to prepare a one time delinquent letter, however, the information was not input into the RITA database. This allowed Lakewood residents, even homeowners, to avoid paying taxes for years.
The City of Lakewood inputs the State of Ohio taxpayer information into is database annually and aggressively pursues non- or under-filers.
Even when the City was part of RITA, Lakewood employed three positions to audit returns, file small claims / civil complaints, and issue subpoenas, since these are additional costs charged by RITA for these services, including researching fees.
Although RITA stated that any audit functions were included in the fees charged, it has since been discovered that many tax issues were missed by RITA at a cost to the City of Lakewood.
For example, recently the Lakewood Income Tax Division issued a substantial refund to a past resident that paid local tax on capital gains (not taxable on the local level) to RITA for eight straight years. The tax returns clearly show this income was derived from capital gains and even had the Federal Schedule D-Capital Gains attached to the tax return. This is an audit item that should not have been missed, especially for eight straight years.
RITA is a well-run and respected income tax agency that benefits many communities throughout Ohio, but it was found and proven that the City of Lakewood could provide these services better to its taxpayers at a lower cost.
Labels: Finance
