For many of us, Labor Day marks the beginning of a new school year and football season. For state budget offices, it’s time for staff to sharpen their analyses of options to balance their Fiscal Year 2028 proposed budgets while advancing their state’s core policy priorities. 

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. Beyond that, states are experiencing a slowdown in their own revenue collections and upticks in demand for critical services while nonprofit service providers are strained.

Some budgeting strategies may take years to implement or require overcoming tough political challenges, but there’s one revenue play that does not: reducing a state’s tax gap, or the difference between taxes legally owed and taxes paid.  

Closing the tax gap increases revenue and improves taxpayer trust

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 financial return on investment from tax collection initiatives is hard to beat, and tax compliance initiatives show constituents how well their government can work for them. Improved tax compliance promotes fairness and efficiency in the current tax system and can reduce the need for tax increases or service cuts.

Maryland illustrates a path forward 

With Maryland’s Fiscal Year 2025 budget,* 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. 

Comptroller Lierman and her team projected increased revenue from the initiative starting at $17 million in Fiscal Year 2025 and increasing to more than $80 million annually by Fiscal Year 2030, which was incorporated into the State budget and five-year forecast. 

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.  

Maryland’s team is also working to collect sales tax owed on previously unreported taxable sales, using some of the new funding to engage two vendors to track out-of-state businesses selling taxable goods and services to customers in Maryland. Since Fiscal Year 2025, they’ve registered approximately 300 new out-of-state businesses for sales tax collection in Maryland and have collected nearly $3 million.

Other Maryland initiatives include:

• Replicating a Pennsylvania collaboration with the US Postal Service (USPS) dubbed Intelligent Mail Barcoding (IMB). For an upfront cost of $500,000 and minimal ongoing costs, Maryland will add special barcodes to outgoing mail, enabling electronic verification of taxpayer addresses with the USPS and keeping state records current.   
• Modeling an Indiana initiative to automate a Financial Institutions Data Match with banking institutions, strengthening the process of seizing funds directly from bank accounts held by those owing taxes. It was reported at a Federation of Tax Administrators conference that the Indiana Department of Revenue matched nearly 300,000 debtors across approximately 300 financial institutions during just one quarter of 2023, facilitating collection of $13 million owed to the state.
• Continuing to collaborate on multi-state audits through the Multistate Tax Commission (MTC), which routinely generates several million dollars in revenue per year for Maryland. Some years have much bigger payoffs: The Maryland Comptroller’s Office reports that MTC audits generated $50 million for Maryland in Fiscal Year 2025. 

Taxpayers seek fairness

Americans support efforts for the government to collect what’s owed. Navigator Research found in 2024 that a majority of Americans find "cracking down on wealthy tax cheats" messaging persuasive. And findings from the 2024 IRS Comprehensive Taxpayer Attitude Survey illustrate the importance of a fair tax system that holds taxpayers accountable:

• 84 percent of taxpayers say it’s "not at all acceptable" to cheat on income taxes 
• 78 percent support following through on penalties and liens
• 75 percent support focusing audits on corporations
• 70 percent support targeting wealthy individuals specifically

To optimize revenue and ensure that the most vulnerable taxpayers are not disproportionately targeted in enforcement efforts, states should be intentional in prioritizing the highest-dollar non-compliance cases.

Taxpayers want a government that works

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. Budget experts pointed to a convergence of pressures—shrinking federal support, sluggish revenue growth, rising demand for services, and a strained safety net delivery system to name a few—landing all at once. 

Closing the tax gap won’t solve every budget problem, but it can raise substantial revenue without increasing taxes or cutting services. Maryland’s experience shows that, with appropriate investments and committed leadership, the return can be substantial. 

A playbook exists—the question now is how swiftly states act on it.

*Helene Grady recently served as Secretary of Budget and Management for the State of Maryland.