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States and Feds go paperless to save at tax season

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Money may not grow on trees -- but cutting back on paper sure saves money. At least that's what a number of states are saying this year.

This year, states are encouraging the use of electronic filing for individual income tax returns by cutting back on the distribution of printed income tax forms in an effort to save money. While some taxpayers may complain, it's a decision that makes sense.

Consider these national statistics: last year, the IRS processed more than 140 million individual income tax returns. Two out of three of those returns were filed electronically.

If states follow similar patterns (and I'm guessing that they do), then the printing and postage budget to distribute individual income tax returns reflects waste of nearly 67%.

In fact, it appears to be pretty darn close. The Mississippi State Tax Commission reported that 68% of individual returns were filed electronically last year, a statistic that contributed to the decision not to mail returns to taxpayers this year. Forms are instead available at public offices and online. Kathy Waterbury, a spokesperson for the department, estimates that the move saved the state nearly $90,000.

New York has taken similar steps to save on costs with considerably more striking results. Tom Bergin, director of public information for the New York State Department of Taxation and Finances estimates that the state has saved about $1 million in print and postage costs.

Mississippi and New York run the gamut of state populations from nearly 3 million (MS) to 20 million (NY). The remaining 39 states which impose a tax on wage and salary-related income are making similar efforts to encourage electronic filing. My home state of Pennsylvania is no different, advising that you can do "Everything Online," from filing and paying taxes to filing for refund on its Taxes and Finance page.

And while seven states impose no personal income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) and two states just tax interest and dividend income (New Hampshire and Tennessee), the sheer numbers of those whothat file state returns may be even higher than those filing federal returns. Unlike the federal government, many states offer no personal exemption for income tax, which means that tax is imposed at the first dollar. Additionally, many state credits such as senior tax credits and poverty credits are only available for those taxpayers who actually file returns. Overall, the requirements to file may affect more residents on a state level than on a federal level.

Even so, states aren't the only ones jumping on the e-filing bandwagon. The Worker, Homeownership, and Business Assistance Act of 2009, which was signed into law by President Obama in November of 2009, requires that all but the smallest return preparers submit individual federal income tax returns via electronic filing. The reason? As with the states, it's all about the budget. It's cheaper to process returns which are e-filed. And cheaper is important: due to budgetary constraints, despite an increase in the number of returns filed overall, the numbers of full-time IRS employees have not kept pace.

The feds and the states will continue to face pressure to make cuts in spending and it's clear that encouraging taxpayers to e-file saves money. It cuts costs not only on printing and postage but also on clerical and administrative personnel. There is no question that more cuts will happen, it's just a matter of when, not what. And it's clearly more popular to cut the fat at administrative agencies than in social programs that support students and seniors. But considering that the revenue collected by these administrative agencies is what pays the rest of the bills, let's hope that cutting costs doesn't mean cutting corners.

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