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Bad Data Makes for Bad Decisions

Legislators as a group are not a terribly innovative bunch and much of what we claim as our own ideas has been passed down from organizations that have a particular political philosophy and propose methods to achieve it. There’s nothing wrong with this, as long as the organization has its facts straight and its numbers accurate.

What can go wrong with this approach to governmental solutions is that legislators will embrace an organization’s proposal as if it were gospel, and never bother to check the facts and figures presented. 

Most state governments have independent, non-partisan research organizations. Montana’s is the Legislative Services Division, which has separate entities that cover legal, financial, audit and environmental areas. It is staffed with some pretty sharp people, and recently one of them picked up a major error in an influential study.

I do a lot of reading about tax policy and how it does and doesn’t affect economic growth, so when I read a study published by the accounting firm of Ernst and Young stating that Montana relies more heavily on business taxes than 42 other states, I paid attention. In fact, my attention was even more focused on the number when the Montana Taxpayers Association used the study to make the point that even after years of cutting Montana’s business taxes, they were still out of line with the norm.

The study—A 50 State Study of the Taxes Paid by Business in FY [Fiscal Year] 2003—was prepared by highly respected researchers in the field of tax policy for the accounting firm of Ernst and Young, and was published by the influential Council on State Taxation.

The researchers included all taxes paid by businesses in every state—property, income, sales, alcohol and cigarette, etc. In cases where a tax was paid by both individuals and businesses, only the business share of that tax was used.

I wanted to find out if it was possible to determine the split between taxes paid by small and large businesses to see if one was being taxed more heavily than the other, so I asked a Legislative Services staff person to look into it for me. In going over the figures used he discovered something totally unexpected: the numbers that Ernst and Young used for Montana weren’t accurate.

Errors were made even in reporting data that was readily accessible: corporate income tax was overstated by $39.7 million ($81 million versus $41.3 million actually received); business share of insurance premium tax was overstated by $5.2 million ($55.1 versus $49.9 million); and mining severance taxes were understated by $20 million ($89 versus $109 million).

But the most disturbing discrepancy found by the legislative researcher—in fact, the one that was noticed first—was that Ernst and Young appeared to be overstating business property taxes by over $326 million... 40 percent higher than they actually were.

Here’s how that came to light. The study claims that businesses paid $778 million in Montana property taxes in 2002. This seemed out of line to the researcher considering that the total amount of all Montana property taxes collected in 2002 was $827 million, and of that almost half would have been paid by homeowners, not businesses.

In an effort to find out if we were interpreting things differently than the study, the legislative researcher contacted Ernst and Young to try to reconcile the discrepancies. Was he missing something that Ernst and Young saw?

Well, we don’t know, because repeated attempts to get Ernst and Young to respond to questions were fruitless. The short answer is, until we can know for certain one way or the other, the results of this study and the conclusions drawn from them are highly suspect. However, this did not prevent the study results from being broadcast as accurate.

It was purely a matter of happenstance and the sharp eye of a state employee that brought this inaccuracy to light. While I might sometimes suspect our numbers were being manipulated to make a point, it would seldom occur to me that the numbers themselves were flat wrong.

I do not believe that this was an intentional error. Regardless, the results of this study, however inaccurate, have influenced the opinions of policy makers across the nation. The most important factor in determining beneficial public policy is to have the numbers right, and Ernst and Young didn’t.

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Senator Jim Elliott Senator Jim Elliott is a State Senator from Trout Creek in his 15th year of legislative service, and is chairman of the Senate Taxation Committee.

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Montana, taxes

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