Department of Taxation and Finance

The Decision To Privatize Personal Income Tax Return Processing and the Projected Cost Savings From Privatization

In 1994 the Department of Taxation and Finance entered into a ten-year contract with Fleet Services Corporation to privatize processing of the State's personal income tax returns. Department officials estimated that the contract, through the use of advanced technology, could cut the cost of tax processing by $76.5 million over the ten-year period. (This estimate was made prior to the decision to move Fleet's tax processing operations to the Kingston area in September 1996.) We audited the process used in deciding to privatize tax We conclude that Department officials did not thoroughly review all aspects of privatization before taking action to privatize personal income tax processing, and recommend that New York State establish formal guidelines for making such privatization decisions. processing operations and evaluated the reasonableness of the estimated cost savings.

We also determined that the original estimated savings of $76.5 million should be reduced by $32.1 million to $44.4 million because of flaws in the procedures used by the Department to estimate these costs and because actual State salary increases during the first five years of the contract were significantly less than projected by the Department. In addition, Department officials estimate savings will be further reduced by $24 million as a result of the relocation of tax processing operations from Albany to Kingston. We recommend that, after the cost of this relocation is taken into account, Department officials, with the assistance of a qualified independent party, re-estimate the contract costs and re-estimate the in-house costs to determine whether the contract is cost-effective.

For a complete copy of Report 96-S-45 click here.
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