Tax audit productivity in New York State

Abstract

This study employs both linear and non-linear approaches to examine tax audit productivity in New York State. Both approaches show a positive relationship between audit revenue collections and the number of the direct audit staff. In addition, the non-linear approach of the reciprocal model discovers the diminishing marginal returns. Using a narrower definition of "direct staff" which excludes upper level audit managers, we find that at the current staff level (877 as of November 2008), the marginal return of an extra staff member is$602 thousand annually, which is consistent with the results of the linear model. The results also show that in order to maximize net audit revenue the State needs to increase the number of direct auditors to 1,522, assuming the marginal cost of an additional auditor is constant at $200 thousand. The non-linear model provides a convenient way to determine the optimal level of staff, given the marginal cost of an additional auditor. Hence policymakers can use this non-linear model as a tool to maximize the State's net audit revenue.