Tax Amnesties Feed State Coffers

Like hungry college students searching under couch cushions for some pizza cash, states are turning to tax amnesty programs to bring in a little extra revenue from delinquent or elusive sources — tardy or non-filing taxpayers

New Hampshire and Ohio are in the middle of tax amnesty periods approved earlier this year. Louisiana and Maryland recently completed their own amnesty programs: Louisiana’s program brought in $80 million, while Maryland’s reaped $39.2 million, well short of the state’s $70 million goal.

Michigan and Nevada have scheduled amnesty periods for next year, and just last week, (12/14/01), Arizona lawmakers approved one for 2002 as well.

With over 40 states suffering from revenue shortfalls, analysts expect more of them to hop on the tax amnesty bandwagon.

“I would expect that there would be an increased interest in them to fill budget holes,” said Harley Duncan, director of the Federation of Tax Administrators, a research and advocacy organization in Washington, D.C.

The typical amnesty program lets people pay back taxes without penalty. States scare up a few extra dollars by encouraging tardy taxpayers to pay back taxes now. And by drawing non-filing residents out of the woodwork, amnesty programs can also increase tax rolls in future years.

Ohio lawmakers earlier this year approved an amnesty program to help balance the state’s budget.

“Back when this biennial budget was being developed in the spring, it was clear revenues were slowing down, so our tax commissioner suggested amnesty as a tool to bring in new money without raising taxes. And legislators bought it,” said Gary Gudmundson, communications director for the Department of Taxation.

The state’s amnesty period began Oct. 15, 2001, and will run through Jan. 15, 2002. It’s restricted to delinquent taxpayers unknown to the state. Anyone who has already been caught evading taxes must proceed through formal tax dispute channels and will likely be forced to pay penalties in full, which in Ohio can be up to 50 percent of taxes owed.

“The leadership in the General Assembly was concerned about a perception of rewarding delinquent taxpayers. Those that we have our hooks in aren’t getting off the hooks,” said Gudmundson.

“Limiting it to unknown delinquents is a cost-effective way to bring these taxpayers back on the rolls. If they come forward, we expect them to pay the full tax, but the penalty is waived and we cut the interest in half,” he said.

By December 7, Ohio had pulled in over $8 million, about half its $17 million goal, from almost 7,000 filers. In addition to this initial windfall, analysts expect the program to generate $5 million annually from formerly unknown taxpayers identified during the amnesty period.

One question mark about amnesty programs is whether they generate any new tax dollars or just accelerate the payment of taxes that would have been collected anyway. Ohio’s program largely skirts this issue by targeting only non-filers, people the state may never find.

But amnesty programs open to taxpayers already identified as delinquent, such as Arizona’s recently approved plan, generate little-to-no new revenue and may end up actually losing money in the long run.

How is that?

By forgiving penalties, states lose out on the extra revenue those penalties generate. And since these delinquent taxpayers have already been identified as such, taxes paid during an amnesty period most likely would have been collected in the future anyway. So what the state receives is just shifted revenue minus penalties, and not new revenue.

But desperate times call for desperate measures, and in these lean times some states are willing to sacrifice a little money in the future for a windfall now.

“They needed something in this fiscal year,” said Arizona Department of Revenue spokesman Jeff Kros, explaining why Arizona lawmakers targeted tardy taxpayers already known to the state.

But perhaps the most challenging question asked of amnesty programs is whether they are fair to the law-abiding. Gerald Bair, spokesman for Iowa’s Department of Revenue and Finance, puts it succinctly: “Should we give breaks to those who don’t pay on time?”