Speech  Testimony of State Auditor Suzanne Bump Before the Joint Committee on Revenue

Boston — Good afternoon Chairman Rodrigues, Chairman Kaufman, and members of the Committee. Thank you for this opportunity to testify on House Bill 6, An Act to Enhance the Work of the State Auditor.

As the State Auditor, it is my job to root out waste, fraud, and abuse in state government programs. I follow the dollars to make sure that taxpayer money is being spent effectively. My office has uncovered record amounts of fraud each year for the last four years, with $9.5 million in welfare fraud identified in the last fiscal year alone. In addition, over the past year alone we have identified more than $530 million in unallowable or questionable billings at MassHealth.

Our work is to ensure that state expenditures, money that you have appropriated, are protected and used appropriately. But there is another type of expenditure that is similarly subject to waste, fraud, abuse, and currently it is beyond the reach of the state auditor – that is, a tax expenditure.

Massachusetts’ corporate tax expenditure budget accounts for $3.2 billion in foregone tax revenue for FY16. However, unlike with MassHealth and DTA,  my office is effectively powerless to ensure that the use of most tax credits, incentives and deductions by businesses is properly overseen by the Department of Revenue.

Additionally, there is currently no process for determining whether these tax credits, deferrals, and incentives actually work. Let me repeat that, we have no way of knowing if a $3.2 billion program is working.

House Bill 6 would remedy this situation by granting my office limited access to corporate tax return information so we can evaluate the integrity and effectiveness of the Commonwealth’s tax expenditure programs.

My office began our work in this area in 2011, when we conducted a review that found little oversight, accountability, or transparency for business tax expenditures. This prompted us to begin an audit of the administration of tax incentive programs to answer questions like:

How do agencies conduct their oversight, verification, and investigation of business tax expenditures?

• If a tax break recipient fails to meet the intended goals or requirements of a given tax credit, how effectively does DOR pursue clawbacks or reimbursements?
• For transferable credits, what entities are the final beneficiaries?

This audit would have provided important answers to these long-unanswered questions, but we were unable to complete it - a statutory restriction on my office’s access to tax return information made it impossible to obtain the data necessary for this review.

The authority we are seeking is currently provided to many other agencies in order that they may fulfill their mandated responsibilities. In fact, one division of my own office already has access to personal tax returns. That is the Bureau of Special Investigations, and it enables us to pursue public assistance fraud investigations. This access is provided as one of the 26 current exemptions to the law restricting access to tax return information. House Bill 6 would add a 27^th exemption. 

So why would we want to examine tax expenditures (aside from the multi-billion-dollar price tag attached to them)?

Take the Life Sciences Center, for example, which, unlike numerous other tax credits, is subject to statutory requirements around verification, transparency, and accountability. The Life Sciences Center makes it public when a company is decertified and must return money to the Commonwealth. However, we learned that the Life Sciences Center has no way of knowing if DOR actually collects that money… and neither do we. Thus, even with strong protections written into law, we are still unable to verify if money is being recouped as it should be.

There is also the issue of transferable tax credits. We do not know who buys these credits or for how much, let alone whether or not those transfers comply with the law. This information is essential in developing and evaluating an effective tax policy.

Recently, while conducting a local mandate review of costs associated with housing families in hotels and motels, we realized that cities and towns have no way of knowing whether DOR is collecting and properly remitting to them the full value of the local option taxes that DOR collects on their behalf. Because we lack access to the tax records, we could not answer that question either.

As you see, there are a myriad of questions that my office could answer of it had access to this critical information provided on business tax returns.

In the work that led up to the 2012 report of the Tax Expenditure Commission, a unanimously-endorsed principle was that tax expenditure data should be fully disclosed for the benefit of both the public and policy makers.

The current prohibition on access to tax return records is inconsistent with that principle. It also does not align with the practice of the vast majority of states. Of the 43 states that require the filing of tax returns, 37 grant access to tax return information to their state audit function. In fact, last year, New Hampshire and Hawaii granted their state auditors the ability to review corporate tax return information for similar purposes. Additionally, the California Legislature this month just granted their state auditor the authority to audit the state’s six largest corporate tax credits. In Massachusetts, we pride ourselves on leading the pack on policy issues, but in this area we are clearly behind the times.

In response to similar legislation I filed last session, the business community raised concerns about how much access our office would have to tax return information. To address those concerns, we tightened the language to narrow the bill’s scope and added explicit privacy protections. The result is that the bill before you today is crafted even more narrowly than those of other states. It is important to note that, according to both Forbes and the Tax Foundation, there is absolutely no link between state auditor access to corporate tax returns and a state’s business-friendliness rating.

Let me be clear, this bill does NOT allow my office to audit corporations doing business in the Commonwealth. I just want to know how well DOR is doing its job, and make it work better for all taxpayers. I hope that the business community will be supportive of this bill.

Taxpayers ask for accountability from all government programs – from the social safety net to environmental programs. They ask that programs that are supposed to work for them deliver on the promises they make – in this case, it’s jobs. This is the kind of government we should be striving for in order to build public trust and protect limited state resources. Until this bill is passed, we are unable to determine if the more than $3 billion worth of foregone revenue is actually a benefit to the Commonwealth and its citizens.

I hope that you will act favorably on this bill. I thank you for the opportunity to speak to you, and I would be happy to address any questions you may have.