Using Technology to Reduce Tax Compliance Costs

June 7, 2006

Connecticut taxpayers may spend a little less time waiting in line to pay their local taxes this July. About two dozen Connecticut towns will join neighboring Massachusetts in allowing taxpayers to use electronic checks drawn directly from bank accounts to pay local taxes.

The town of Pomfret offered this payment option last July, although few taxpayers chose it. Now, as other towns follow suit and word spreads, local officials across the state expect more taxpayers to use electronic checks. Many Connecticut towns already give taxpayers the option of paying online with a credit card, but the transaction fees charged by collection firms can make this an expensive payment method.

The cost of paying with an electronic check is 25 cents—for the taxpayer, that is; it costs the town nothing. This is less than the cost of a stamp, and for many taxpayers it may be less than the opportunity cost of standing in line waiting to pay in person.

From the Hartford Courant:

“Some people actually look forward to waiting in line at town hall because it is their chance to chat with their neighbors,” said Mary Nork, the tax collector of Haddam. “But for others, that’s not their cup of tea. Some people prefer being online to in line.”

Paying taxes online is the “next big thing” in municipal tax collection, said Stan Gorzelaney, the president of the Connecticut Tax Collectors Association and tax collector of Greenwich. Town leaders think it will cut down on paperwork, while taxpayers like the convenience, he said.

For taxpayers with the necessary computer technology, this new option may indeed decrease compliance costs, although for those lacking the necessary technology or know-how, this option would likely increase the time it takes to pay taxes. Offering taxpayers a choice of payment method allows each taxpayer to choose the method that will most effectively lower her compliance costs.

However, the high cost of tax compliance stems mainly from calculating the taxes owed rather than from paying those taxes; the length and complexity of tax codes—federal, state and local—are the main reasons taxpayers expend so much time, energy and money paying taxes. Legislators and tax collectors should keep this in mind when attempting to lower compliance costs.

For more on tax compliance costs, click here.


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