State government will rely on income taxes more than ever to finance operations this year, but its revenue collection agency has less than 70 percent of the staff it did when the tax was enacted 20 years ago and could lose several dozen more positions this year.

Kevin B. Sullivan, the commissioner of revenue services, said Tuesday that the department has launched several initiatives to enhance collections and cut costs, despite losses in both numbers and experience, as well as a branch office in New Haven.

That means computer programs to target delinquent taxpayers most likely to repay big debts, early intervention efforts to target small businesses before they fall into delinquency, and using electronic transfers instead of checks to distribute most income tax refunds.

“There is a significant erosion of expertise that is walking out the door,” Sullivan said during Gov. Dannel P. Malloy’s monthly commissioners’ meeting at the Capitol. These include senior auditors, collection specialists and key legal staff.

New restrictions on pension and other post-employment benefits included in the state employee union concession deal ratified last week already have produced a surge on retirement applications this fiscal year from senior workers hoping to leave before the system changes in October. And Sullivan said his agency could lose as many as four dozen additional veteran staffers before it’s over.

Any loss would be challenging, the commissioner said, given that the department, which had 1,055 positions when the state income tax was enacted in 1991, has dropped steadily over time and now has funding for 734.

Further complicating matters, while the income tax provided 36 percent of revenue to support annual operating costs when adopted, it reached a new high level of 52 percent in 2010 — further emphasizing the need for effective collection and enforcement policies.

The income tax is paid both by residential households as well as by many small and mid-sized businesses that don’t report earnings through the corporation tax. The department receives income taxes both through paycheck withholdings as well as quarterly payments from the self-employed and recipients of capital gains, dividends, other large investment income.

The state also uses its income tax as a means to collect sales tax owed on many Internet purchases. Connecticut residents who acquired items online without paying sales tax at the time of purchase are supposed to report the tax and add it to their income tax obligation on their annual return.

And if processing four million income tax returns annually wasn’t complicated enough, Revenue Services also is scrambling to implement a record-setting 118 tax changes spread across the entire revenue system, Sullivan said. Those changes were ordered by the governor and legislature as part of a $1.5 billion tax hike approved to help close an unprecedented budget deficit. This included increases in income, sales, corporation, fuel, cigarette, alcohol and other levies.

These growing challenges “don’t mean we can’t do our jobs,” the commissioner added. “It just means we have to start thinking differently.”

For example, while most staffers traditionally develop expertise in one tax category, such as sales or gasoline, Sullivan said the ongoing “rolling reorganization” at DRS is promoting more diversity of knowledge among staff. “We don’t have the luxury of having those narrow roles,” he said.

The department hopes to seek proposals later this fiscal year for new software to analyze delinquent tax cases, contrast them with past history, and predict which ones are likely to lead to a swift and sizeable settlement.

Sullivan said the agency also has a new focus on early intervention.

While some businesspeople dishonestly fail to remit income or sales taxes, most are simply struggling. Rather than wait until several rounds of penalties and interest have been imposed and the matter heads to court, “where we’re likely putting them out of business,” Sullivan added the state needs to reach out to these businesses earlier to see if solutions can be found.

And though it’s too soon to say whether the longstanding practice of refunding income taxes through checks will cease next spring, that system is on borrowed time, Sullivan said. The cheaper solution in the long run is to distribute most refunds electronically, he added, even if it means issuing debit cards to those few who cannot provide a bank or credit union account number to receive the refund.

Keith has spent most of his 31 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut’s transportation and social services networks. He has been the state finances reporter at CT Mirror since it launched in 2010. Prior to joining CT Mirror Keith was State Capitol bureau chief for The Journal Inquirer of Manchester, a reporter for the Day of New London, and a former contributing writer to The New York Times. Keith is a graduate of and a former journalism instructor at the University of Connecticut.

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