Opinion: Free File: Innovation that can save California’s tax dollars

Home » Opinion: Free File: Innovation that can save California’s tax dollars

October 16, 2009

The Mercury News

California legislators adjourned a few weeks ago without implementing one of the most obviously beneficial public-private partnerships in recent memory, a partnership that could help low-income Californians obtain tax credits they earned and bring as much as one billion needed dollars into the state’s economy.

This program is called the IRS Free File. It’s a partnership between the U.S. government and the American software industry that offers online tax preparation and electronic filing to low- and middle-income taxpayers with adjusted gross incomes of $56,000 or less per year. Created seven years ago, Free File has grown into the largest taxpayer assistance program offered by the U.S. government. The best part – it’s free, donating more than 30 million tax returns to citizens in need. To date, 20 states have created Free File programs so their eligible taxpayers receive both their state and federal tax returns for free.

Simply put, it’s a program that works. Yet Californians can’t get free tax returns from Free File because California has its own costly, taxpayer-funded online software systems. At a time of unprecedented budgetary pressures, the state-created and operated tax preparation programs, Ready Return and CalFile – run by the tax collector itself – have very low usage. Thus the state has spent millions of dollars over the years to create an inferior service to the state-of-the-art software donated at no cost through Free File.

California legislators would be wise to approve this program when they return to Sacramento.

How it works is simple. Participating companies can’t market or sell ancillary services to the taxpayer; the program’s only purpose is the preparation and filing of tax returns for low-income people. One of its founding premises is that if the software industry donates the tax services, government will not develop or deploy its own competing software products and services. Government and the taxpayers thus save money, and industry has a stable marketplace within which to innovate and vigorously compete, naturally driving down prices.

Where Free File has been used, it’s earned rave reviews. Independent surveys conducted by the IRS found that 94 percent of Free File users intend to use the service again, and 98 percent would recommend it to a friend.

In contrast, commercial innovation has led to software designed to help taxpayers identify all the credits and deductions they are entitled to but don’t claim, such as the Federal Earned Income Tax Credit (EITC). Today, roughly 625,000 Californians do not claim EITC, leaving over a billion unclaimed dollars annually. Joining Free File would allow 70 percent of California’s low- and middle-income households to file free federal and state returns together.

Over the years, every effort by legislators to move California to join Free File as the better deal has been rejected, even fought, by the Franchise Tax Board and their constituencies. Not solving this problem has been part of our political gridlock for too long, preferring the protection of continued public spending over saving taxpayer dollars.

The smart course for California to take couldn’t be more obvious. In the midst of a budget crisis, California should embrace innovation in our tax collection system.

Free File is the ultimate win-win solution that has drawn bipartisan support at all levels. It’s more efficient than our current system and saves all of us money. When legislators reconvene and begin looking for ways to save money, they should stand up for a program that will benefit all California taxpayers. The time has come for California to join the IRS Free File Program.

Jim Hawley is acting CEO of TechNet. He wrote this article for the Mercury News.