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Abstract: This Article argues that states and the federal tax authorities coordinate and cooperate in subtle ways to reduce some of the inefficiencies of our tax system. Indeed, two levels of taxation may offer some previously under-appreciated benefits in compliance and enforcement. For example, having both state and federal income taxes may strengthen voluntary compliance. Research suggests that the threat of federal audit increases voluntary compliance with state income taxes, and the reverse may also be true. Thus, the existence of two separate tax administrations helps to deter tax evasion. Further, because the states and the IRS often select returns for audit based on different criteria, two systems offer an additional check on the accuracy of taxpayer returns, increasing the efficacy of enforcement efforts. The states and the federal government share audit results with one another.
In light of these benefits, this Article argues that these partnership model programs should be strengthened. Using insights derived from an examination of current effective programs, the Article suggests factors that make the programs successful and steps that might be taken to extend the reach of this partnership model in tax compliance and enforcement. First, productive personal relationships between IRS officials and their counterparts at state revenue departments often help to ensure the success of these programs. Second, the existence of clear institutional responsibility for these programs is likewise important to their receiving continued attention within the IRS bureaucracy. Third, the broad authorization Congress provided to the IRS to implement many of these programs allows the agency to work with the states in a cooperative fashion to develop these programs, and improvements in information technology will offer additional opportunities for federal-state partnerships.
This Article also suggests that these cooperative programs may allow state policymakers more flexibility to deviate from federal tax law when it conflicts with state policy interests because the benefits of these programs do not depend on significant conformity.
The Article proceeds as follows. Part II provides a brief background on state tax systems and scholarly concerns about inefficiency resulting from our dual tax system. Part III describes the partnership model used in tax enforcement and compliance programs and discusses how these programs differ from what is usually meant by cooperative federalism. Part IV outlines how cooperative programs ameliorate some of the concerns about the inefficiency of administering two separate income tax systems. Part V provides recommendations for how Congress and the IRS can work to strengthen cooperative programs and shows how these programs offer state policymakers greater policy flexibility. Part VI concludes with suggestions for further research.
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