Case Study II-4 Mining Data to Increase State Tax Revenues in California
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Teaching Note on Case Study II-4
Mining Data to Increase State Tax Revenues in
California1
Objectives
This teaching case illustrates several technical, organizational and political challenges associated
At Bentley University, this case study has been used in the required MBA course, Strategic
Information Fundamentals. It would also be useful for other graduate or undergraduate courses
in IS management or data management or E-government courses. The specific learning objectives
for the case include:
Overview
Key Case Facts
The INC system, developed by IBM for the Filing Compliance Bureau of the California
Franchise Tax Board (CFTB, the tax collecting agency for the State of California), was launched
in 2001. The system utilizes a data warehouse containing information on direct and indirect
ians. Data collected from various federal, state, county and local
sources were analyzed to identify possible non-filers and under-reporters and to estimate the taxes
they owed.
Case Study II-4 Mining Data to Increase State Tax Revenues in California
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McAfee, Andrew. Mastering the three worlds of information technology. Harvard Business
Review, November 2006.
Technical Challenges
In order to utilize data from sister agencies and other governmental organizations, significant
work needed to be undertaken due to a lack of standards for software and data management.
Resource constraints amplified these issues, as many agencies recognized that their legacy
systems needed to be upgraded in order to share data easily.
Administrative Challenges
While the case revealed that shared data could be used to identify tax cheats, it also revealed that
resource constraints impeded this sharing. Who should shoulder the cost of preparing data so that
it can be shared across incompatible systems? This was the central issue for many over-burdened
agencies.
Socio-Political Challenges
Another challenge arose out of the ambiguity of certain data. For example, the case reports that
Lessons Learned
Businesses have sought to improve their operations by investing in data mining tools and data
warehouses and sharing information across organizational boundaries. Government agencies are
also developing data warehouses and setting up inter-agency data sharing arrangements. Taken
Case Study II-4 Mining Data to Increase State Tax Revenues in California
Epilogue
From 2003 through 2006 the Bureau issued 500,000 Notices of Proposed Assessment. They
estimated that 750,000 California citizens would receive Notices in 2008 for failure to pay taxes
Figure TN-1 State of California General Fund Revenues
Personal Income Tax
$ 38,540
50.1
$ 43,790
49.1
$49,947
54.8
$52,353
56.1
Figure TN-2 Non-filers Detected Through the INC System
Fiscal
Year Issued1
Returns
Filed2
Total
Assessments
(millions)3
2000/2001
87,647
$
261
2001/2002
294,216
151,102
$1,669
2004 2004 2005 2005 2006 2006 2007 2007
amount
(millions)
% of
total
amount
(million
s)
% of
total
amount
(million
s)
% of
total
amount
(million
s)
% of
total
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Questions for Discussion
1. What are the benefits of using the new INC system?
California was roughly the size of the California budget deficit. Improved tax compliance would
2. Why
1990?
Expect a pause as students consider the hardware, software and database technologies that needed
to mature in order for the INC system to be developed in 2000. Give students an opportunity to
offer their ideas, after which a brief lecture on data warehouses and data mining might be in
order.
Data management has improved over the last few decades. In the seventies, companies invested
in database management systems so that multiple software applications could post data to or draw
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3. How well did managers at the Filing Compliance Bureau address technical challenges?
While many companies invested in data warehouses and data mining tools in order to analyze
data emanating from different business units of the same firm, the Bureau was primarily
interested in analyzing data that came from entities outside their organizational boundaries. Ask:
How does the fact that the data were coming from external organizations complicate things for
the Bureau, from a technical perspective? As students offer their observations, record them on the
board under the heading Technical Challenges. For example, students may mention that many of
the other agencies which gathered data that could be useful to the Filing Compliance Bureau
unfortunately stored their data in incompatible systems or in forms that otherwise were difficult to
translate for Bureau purposes.
abilities to share data. Once a particular data source is identified as being of value, there may be a
4. How well did managers at the Bureau address various political and social challenges?
system. However, citizen backlash and concerns about privacy violations led the Bureau to
driving an expensive car, for example. The Bureau needed to have a reasonable basis for
Case Study II-4 Mining Data to Increase State Tax Revenues in California
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imagine that Frank Lanza may have felt relieved to have dodged a bullet by not signing a data–
sharing deal with ChoicePoint.
The instructor can wrap up this portion of the discussion by asking students: Are these political
issues unusual for an inter-organizational information sharing initiative? The answer, of course,
Next, turn to administrative challenges. Some agencies in essence said that if the Bureau would
pay to upgrade their systems, they would make their data available. Frank Lanza discussed the
a law was proposed to require them to share data.
5. What advice would you offer Frank Lanza and Mary Yessen?
Ask students for short-term and long-term recommendations. In terms of technical
recommendations, in the short term the Bureau can focus on sources that are relatively easy to
obtain and do not require heavy manual intervention, but should also begin to build translator
systems (middleware). Long term, there would be great value in standards-setting efforts that