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In California, the state does your taxes

State of California Franchise Tax Board.

TEXT OF STORY

Tess Vigeland: Raise your hand if you're one of those waiting 'til the last minute to file your taxes. I can't see you, but I feel you. Why do today what you could put off 'til tomorrow, right? Well, the tomorrows are in short supply at this point. So, what if I told you that the government could do it all for you?

Julie Small reports on a program here in California that does just that.


Julie Small: California dreamed up the idea about a few years ago: Why not take information the state franchise tax board gets from employers -- y'know the stuff on your W-2 and 1099 forms from your bank -- and have the board fill out your state return for you? The program's called ReadyReturn, and it's up and running.

Colleen Odell: Actually, I received a notification in the mail that gave me my code number.

25-year-old Colleen Odell tried out ReadyReturn this year. The state franchise tax board notified some people, like her, directly to spread the word about the program. But most Californians have to check the tax board's Web site to see if they're eligible. Odell says if you are, you're in for a treat.

Odell: And it was pretty simple as in A, B, C, D. It kind of gave you the simple steps.

Odell reviewed her state-generated ReadyReturn on-line -- checked it against her own records -- and signed off. It only took 15 minutes. And Odell saved $65 she would have paid a tax preparer.

Odell: This is actually the first year that I didn't pay somebody to perform my taxes for me. I actually did them on my own. And I feel confident that I was able to do it.

ReadyReturn saves California money too. The state would have spent $2.50 to process Odell's paper return, but California spends less than 40 cents to process the ReadyReturn.

John Chiang: We're on to something here.

That's State Controller John Chiang. He heads California's tax board.

Chiang: When you have an easy program, when your friends talk about the program, when they're not afraid of looking at all the different numbers or the forms, you know, you have one easy form, then it encourages people to file.

Chiang can't use ReadyReturn, because his taxes are too complicated. The program's limited to single filers or heads of household who get income only from wages and only from one employer. You can't take itemized deductions, you can't have more than five dependents, and you are allowed one tax credit. In California, that tax situation applies to about two million people.

But last year, only 60,000 of those taxpayers used the program. Controller Chiang blames the stingy $10,000 budget he has to advertise ReadyReturn. This year, that paid for flyers and posters.

But tax expert James Maule thinks Californians snub ReadyReturn for a reason.

James Maule: They got the thing and then they never turned it back in, because it was a mess. They just realized "This is not really my return. This is the first five minutes of my return."

Maule teaches tax law at Villanova University in Pennsylvania. He says the government can't know all the complicated details of a person's life that change tax liabilities. So people will do one of two things -- either check the government's math, in which case, why not just file your own tax return? Or they'll take the government's word for it and maybe pass up credits or deductions they could have qualified for.

Maule: So it's not really saving very many people much work. Except, that it will take advantage of what I call "inertia on the other side" and that is people say, "Well, the government did this, so it must be OK.

California is the only state that offers pre-filled tax returns, but other states are thinking about the idea. And so is President Obama. In fact, Obama's leading economic advisor Austan Goolsbee came up with a federal version of the ReadyReturn. President Obama wants to adopt what they call "Simple Return." It's aimed at 40 percent of Americans who file straightforward federal returns -- that's about 53 million people. Goolsbee estimates that would save taxpayers 225 million hours of time, and $2 billion a year in tax-preparer fees and tax preparation software.

The Computer and Communications Industry Association hates the idea. The trade group includes tax preparation software companies like Turbo Tax maker Intuit.

President Ed Black says taxpayers should hate it too.

Ed Black: The incentives are clearly there for the government to maximize revenue, and for the private sector to maximize taxpayer awareness of the benefits and credits that are available to them.

And there's a logistical problem. Last year, the IRS said the Simple Return isn't feasible, because employers don't send the feds W-2 data early enough in the year. But that could be changed, if the political will existed.

Sacramento taxpayers Briget Bagney, Raj Bal Singh and Barbara Fontaine say bring it on.

Briget Bagney: I would actually welcome any simplification of the process, 'cause there's really no way of getting out of it, one way or another.

Raj Bal Singh: That is good, and I'm going to do it, if they allow me to do it.

Barbara Fontaine: Yes, I'm ready! I'm ready. I need all the help I can get.

President's Obama's Economic Recovery Advisory Board plans to consider return-free tax filing along with a bunch of other proposals to simplify the U.S. tax code later this year. That means for now, everyone's stuck with filling out the federal forms, even here in California.

I'm Julie Small for Marketplace Money.

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