Commentary: Should the Legislature Get Access to our Personal and Business Tax Returns?

by William Sayre (MAY 12, 2013)

As often happens in Montpelier in the month of May, a little noticed provision in major piece of legislation, erupts in controversy, as lawmakers, with a little help from the people who would be affected by the new law, discover the unintended consequences of what the law proposes to do.

This year is no exception, and the little noticed provision, now erupting in controversy, is one that would give the Legislature access to our personal and business income tax returns.

Why is this a Problem? Whether or not to allow the Legislature to examine our tax returns, is a far more momentous decision than some, perhaps most, may realize. Why? Because doing so would violate the long standing policy that, except in the case of a criminal investigation, our Vermont income tax returns will be examined only by Vermont Tax Department professional staff. Not by staff in other branches of government, and certainly not by elected officials, who for better or for worse, might be tempted to use the personal information they discover, for political purposes.

Upholding this policy in Vermont, and a similar policy in Washington DC, for federal tax returns, is essential if taxpayers are to be confident that the information they provide on their tax returns will not be used for purposes other than calculating taxes due, and taxes paid. Not for political purposes, nor for other potentially mischievous purposes.

Why is this important? When taxpayers lose this confidence, they can begin to lose confidence in the rule of law, and ultimately, confidence in the idea that they can trust their government. It also can affect the economy, which affects us all, including those of us who don’t pay income taxes. If entrepreneurs begin to lose confidence in the confidentiality of their tax returns, they are less likely to invest in capital – buildings, machinery, equipment, and technology – in growing their companies. Less likely to create new jobs, and to improve the productivity, and therefore the income, of the jobs they already have created. And less likely to create the very tax base, that the Legislature wishes to examine.

Has the Legislature attempted to Correct the Problem they Propose to Create? In response to taxpayer criticism of this proposal, legislators, good people with good intentions, are attempting to limit who among their staff would be allowed to examine tax returns, and also to conceal the identity of the individuals and businesses who filed the tax returns they want to examine. Once again, the intent is good, but the core of the problem remains.

How is it that the core of the problem still remains? While it may be possible to limit the Legislature’s direct access to tax returns, it is nearly impossible to limit indirect access. For example, suppose a powerful legislator, who does not have direct access, asks increasingly specific questions of a subordinate staffer, who does have direct access. It is naïve to think this will never happen, perhaps innocently, perhaps with good intentions, at least in the eyes of the legislator asking questions. What is a staffer, the subordinate, and wanting to be helpful, to do?

Then there is the likelihood that there will come a time when legislators seek the authority, as in the original version of the legislation this year, to view for themselves the personal and business tax returns they want to see.

Risk of Breach rises exponentially, with the number of people, and the number of Departments, who have access to individual returns. It will be more likely that there will be innocent, unintentional breaches of confidentiality. The more people who can examine tax returns, the greater the risk of breach, with the risk rising exponentially.

And because both the Department and the Legislature will have access to confidential information from personal and business returns, if there is a breach, it will be unlikely, if not impossible to isolate where the breach occurred. Whereas now there is no question. This will make future breaches more likely, not less so.

It also is important to remember, I believe, that Vermont is a relatively small state, and with a little effort, it will be possible to work backwards from the tax data, to identify a particular group of taxpayers, and particular taxpayers, even if their personal or business names are redacted.

Why is Confidentiality less of a problem for Tax Department Staff than for Legislative Staff? It has taken decades to create and nurture a culture of confidentiality in the Tax Department, and to build and reinforce an ethic within that Department, in which all concerned are committed to safeguarding information from individual tax returns. Even within the Tax Department, though, I’m sure there have been times, when people, most with good intentions, some with intentions not so good, have been tempted to ask for confidential information, which then might be used for political purposes. But the honor and integrity, and the political will, were always there to resist the temptation to cross the line.

Lead us not into Temptation. Legislative staff are honorable, decent, and good too. Of course they are. That’s not the question, though. The Legislature is a different institution than the Executive Branch. The diversity of political views is much greater, naturally. And therefore, so aren’t the political impulses, tensions, fears, hopes, and temptations. And the relationship between the elected official, and the staff reviewing tax returns, is different for a governor, than it is for legislators. The relationship with legislators is more personal, informal, and familiar. All these factors combine to make it more difficult, far more difficult, to maintain the culture of confidentiality among Legislative staff examining tax returns, than it is among Tax Department staff examining tax returns.

What should be the policy? For all the reasons above, policy should stay as it is. Tax returns, once we send them to the Vermont Tax Department, should stay there. Secure and confidential. The Tax Department produces reports, often at the request of the Legislature, using information aggregated from individual tax returns. But never releases individual returns. If the Legislature is unhappy with the reports that they receive from the Tax Department, then let’s work together to improve the quality and timeliness of the reports. Let’s not violate longstanding policy, by giving the Legislature access to individual returns, even on a redacted basis.

What is a reasonable compromise? Before our Legislature makes a decision of this gravity, why not ask which other States allow their Legislatures to examine personal and business tax returns. We know that the Congress can’t examine federal tax income tax returns. And if we find States that do, why not carefully investigate what protocols and procedures they have in place to safeguard confidentiality.

We should take the time to do so.

I believe we will find that there are few if any States that do allow this. If I’m wrong, we can always add this Legislative prerogative next year, with all the necessary safeguards. After all, we’ve survived for 80 years without allowing the Legislature to examine income tax returns, waiting one more year will be a small price to pay for getting it right.

On the other hand, if we find that there are few if any States that allow their Legislatures to examine personal and business income tax returns, we should ask why that might be. We just might find that now is no time to change policy. Especially when the Governor, the Legislature, and so many others, are working hard to build a better business climate in Vermont. Part of accomplishing that goal means that our tax burden must be competitive, and stable. But another part means that individuals and businesses must be able to trust the integrity of our tax structure, and those who create and administer it, and to have confidence in their commitment to maintain the confidentiality of the information on the tax returns they receive. The Tax Department has a history of honoring this trust and confidence. So may it always be.

William Sayre is an Ethan Allen Institute Board Member. He is an economist, formerly with the Federal Reserve, and hosts the Ethan Allen Institute’s Common Sense Radio, broadcasting from WDEV radio, in Waterbury. 96.1 FM, and 550 AM.

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