Input: IT spending on state, local tax systems to rise

State and local governments will be spending more money developing their taxation, revenue and collection information systems in the next five years, according to a new report by a research analysis firm.

Based on recent spending trends and contract activity, Reston, Va.-based Input forecasts that the market will grow from about $550 million in fiscal 2006 to about $755 million by fiscal 2010 at a compounded annual growth rate of 8.3 percent.

Although such systems represent a small proportion of total information technology budgets, state and local governments are focusing more on financial management and projects to improve financial performance, the report indicates.

“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,” according to the report released today.

The report, which Input analyst James Krouse wrote, lists several factors that contribute to this trend, including expanding state efforts to impose e-filing mandates on businesses and others, greater adoption of electronic funds-transfer programs and advanced analytics to identity discrepancies in tax returns.

Of particular note, the Streamlined Sales Tax Project, a 5-year-old voluntary effort among states to simplify and modernize their sales and use tax systems. The report indicates that there is an increasing likelihood that federal legislation will be passed to mandate participation. If that happens, it could “account for the most significant transformation of state tax systems in decades,” the report says.

Also, an Internal Revenue Service-sponsored Tactical Advisory Group has focused on improving communication and cooperation between the IRS and states on the use of electronic processes across such tax and revenue operations. It has developed and promoted several efforts and programs.

After two years, state and local government budgets are stabilizing but they are also bearing a greater load of certain social and health services such as Medicaid because the federal government, which is dealing with an increasing budget deficit, is cutting back on financial matching and assistance.

“The financial result is an increase in the program operational burden on state and local governments,” the report states. “As this cost shift continues toward state [and local governments], these jurisdictions will more aggressively seek opportunity and system solutions that will improve returns.”