Tax audit productivity in New York State

Abstract

This study employs both linear and non-linear approaches to examine tax audit productivity in New York State. The linear approach shows a positive relationship between audit revenue and the number of audit staff within the New York State Department of Taxation and Finance’s Audit Division. Using a narrower definition of “direct staff” which excludes upper level supervisors (staff at grade level 27 or higher, we find that the impact of an additional auditor is $590 thousand; using a broader definition of “direct staff”, which includes upper level supervisors (staff at grade level 27 or higher), the impact is $496 thousand. The non-linear approach discovers the diminishing marginal returns. At the current direct staff level (877 as of November 2008, the narrower definition) in the Audit Division, the marginal return of an extra direct staff member is $602 thousand, which is consistent with the results of the linear model. The results also show that in order to maximize net audit revenue the State needs to increase the number of auditors to 1,522, assuming the marginal cost of an additional auditor is constant at $200 thousand. The non-linear model provides a convenient way to determine the optimal level of staff, given the marginal cost of an additional auditor. Hence policymakers can use this non-linear model as a tool to maximize the State’s net audit revenue.