“State budget planning will be especially challenging this year, as states grapple with managing shifts in federal funding from last year’s One Big Beautiful Bill Act (OBBBA) and other federal policy changes,” according to a paper by Helene Grady of the Urban-Brookings Tax Policy Center.

A couple of weeks ago Barrett and Greene, Inc. published a Management Update item about a report written by Lucy Dadayan, of the Urban Institute, that stated, “slower economic growth, heightened geopolitical uncertainty, renewed inflationary pressures, financial market volatility, and uncertainty surrounding federal fiscal policy and intergovernmental funding,” were all contributors to difficulties in accurately forecasting revenue stress.

This newer report offers a partial solution: attacking the states’ tax gaps – the “difference between taxes legally owed and taxes paid,’ write Grady.

According to this work, “The IRS estimates the federal tax gap at roughly 15 percent of the estimated true total taxes owed. This suggests that there are substantial state-level tax gaps as well. While few states know precisely the magnitude of their gaps, all states should focus on improving collections.”

The Tax Policy Center’s work points to Maryland as a place that has attacked this gap successfully. As the paper explains, “State Comptroller Brooke Lierman successfully secured $6 million in new funding for her office’s compliance audit team—a little more than $2 million for additional personnel and nearly $4 million for new vendor contracts and other non-personnel investments.”

There’s been a big payoff to this increased focus and as the Tax Policy Center paper states, “In its first full year of implementation (Fiscal Year 2026), the entire audit compliance unit collected a total of $679 million in delinquent personal income tax revenue, an increase of $121 million or 22 percent compared to Fiscal Year 2024 (the last year before the new investments). The new staff alone identified and added to the tax base over $100 million in previously unreported income and assessed more than $12 million in personal income tax.”  

This is clearly a popular approach and, and the Tax Policy Center points out, “closing the tax gap quickly emerged as one of the leading solutions during a budget “policy accelerator session convened by the States Forum in July”

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