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Column: A Breach of Privacy in Vermont

(Ken Teegardin photograph)

(Ken Teegardin photograph)

Berlin, Vt.

The Vermont Legislature has breached an important line of privacy — the confidentiality of Vermonters’ tax returns. On May 13, at the end of the legislative session, Sen. Tim Ashe, D-Burlington, the new chairman of the Senate Finance Committee, slipped language into a bill giving legislative staff access to “state returns and return information.” This language, after refinements following discussions with members of the House Ways and Means Committee, received legislative approval the next day.

Ashe’s last-minute change to tax law mandates the tax commissioner to enter into a ”memorandum of understanding” with the Legislature’s chief fiscal officer to provide “state returns and return information” to the Legislature’s Joint Fiscal Office, which staffs Ashe’s committee. This language applies to all returns — income, sales, corporate, meals and rooms, bank franchise and all other tax returns processed by the Tax Department. The language could encompass federal tax returns as well, as much of the information in state returns depends on federal return information. The language broadly states that the memorandum of understanding contain mechanisms and protocols to prevent the identification of taxpayers and that it incorporate “penalties for unauthorized disclosures” of such information. However, such mechanisms, protocols and penalties are not explicitly set forth, and a memorandum of understanding is a poor substitute for the force of law.

For the stated purpose of conducting “studies, forecasts and fiscal analysis,” legislative staff don’t need to see individual returns. The Legislature’s economist already has authorized access to all Tax Department data. The current system works quite well. For example, last year the revenue forecast agreed to by executive and legislative branch officials was right on target.

Most importantly, the Tax Department has developed a culture and discipline that respects taxpayer confidentiality and shelters taxpayers from the misuse of their data for marketing, political and other inappropriate snooping. Here are just some of that culture’s elements not found at the Legislature:

∎ The Tax Department operates behind locked doors where taxpayer returns are secured.

∎ Taxpayer returns are available to department staff only on a need-to-know basis. Neither the governor nor the secretary of administration, for example, has access to returns, even on a redacted basis. The tax commissioner is also denied access to returns unless there is a clear need to know for enforcement purposes.

∎ The Tax Department’s computer systems are structured to support and monitor this need-to-know policy. Access to returns is tracked. For example, if the Tax Department receives a complaint of breached confidentiality, as part of an investigation of the complaint, the system will report who specifically accessed a return.

∎ State law is unforgiving with regard to departmental staff protecting taxpayer confidentiality. It reads in part: “No present or former officer, employee or agent of the Department of Taxes shall disclose any return or return information to any person who is not an officer, employee or agent of the Department of Taxes. ... A person who violates this section shall be fined not more than $1,000 or imprisoned for not more than one year, or both; and if the offender is an officer or employee of this state, he or she shall in addition be dismissed from office and be incapable of holding any public office for a period of five years thereafter.”

∎ To ensure that the department’s systems protect taxpayers’ privacy, the IRS periodically audits the Department of Taxes. These audits are exhaustive. During my term as tax commissioner, for example, an IRS audit revealed that a door hinge was on the exterior of the door frame rather than the interior, allowing someone to pull the pins on the hinge and access an interior space. Should an IRS audit find that the department does not meet standards, the IRS will not share federal return information with the department.

The next legislative session certainly will be a mad dash by some legislators to increase tax revenue. The $212 million budget increase they just approved is temporarily supported by $50 million to $70 million of unsustainable one-time funds needing replacement next year, and additional millions are needed to support Vermont’s health care reform. However, in this dash for cash, exposing Vermont’s taxpayers to a higher risk that their tax return privacy will be breached or its content politicized is reckless. There is so much private information on any return that legislative staff and legislators should not have access to it. Though a name, address or Social Security number can easily be redacted, other details on a tax return — charitable contributions, health savings account information, investment and student loan data, rental or farm property specifics, school district code and property tax data, proprietary corporate information — make it all too easy to connect a specific taxpayer to a redacted tax return in our small and intimate state.

Ashe’s ill-considered, last-minute change broadening access to tax returns will end badly. Once the first breach of taxpayer confidentiality occurs, Ashe and those crafting and implementing the memorandum of understanding that this legislation mandates should be prepared to suffer the same unforgiving penalties as currently apply to Tax Department employees.

Tom Pelham was finance commissioner in Gov. Howard Dean’s administration, tax commissioner in Gov. Jim Douglas’ administration, a member of the Legislature and co-founder of Campaign for Vermont, an organization that advocates for fiscal responsibility.