Hard-up states hide stick, offer carrot to tax dodgers
Faced with growing budget shortfalls, a few states are introducing tax amnesties. Some question their fairness.
On one recent morning, a staffer in an obscure office of the Ohio Department of Taxation received more than 100 frantic phone calls by 10:30.
Most of the callers had the same plea: I've got some money I want to give you. Please take it. Please take it today.
The calls were coming in on the last day of a special "amnesty" program offered by the state as a way to collect on overdue taxes.
Ohio was offering tax dodgers, both individuals and businesses, a "one-time" chance to pay their overdue levies - and avoid having to pay back interest, or face criminal penalties in the process. The result: The state took in some $24 million in one month.
From Michigan to Nevada, a number of states are resorting to amnesty programs in an effort to wring every last 50-cent piece out of delinquent taxpayers - and add much-needed revenue to state treasuries.
The low monetary cost of such programs makes them irresistible to some states (Ohio's total advertising and administrative budget for its amnesty program was only $500,000). Politically, amnesty is a much more palatable revenue quick fix than either raising taxes or cutting programs, although forgiving tax evasion can sometimes leave lawmakers open to the charge of being soft on "crime." Proponents, however, argue it's a win-win for taxpayers and revenue-hungry states who want to clear their consciences and their books, respectively.
"Most taxpayers who are delinquent are not dishonest people, more likely they didn't understand the law because it's complicated or they got themselves in some financial difficulties and therefore skipped a payment or whatever," says Thomas Zaino, Ohio's tax commissioner. "It gives those folks a chance to come forward and get this off their chests and sleep a little better at night."
In addition to Ohio, Maryland, and Louisiana offered such programs last fall and New Hampshire is in the middle of a 10-week amnesty effort. Arizona, too, will soon take its second trip down amnesty lane this year - it was the first to initiate such programs in 1982.
Those who question the effectiveness of the laws are especially irked by a recurring theme: These "once-in-a-lifetime programs" are being repeated every few years in some cases. While this was Ohio's first ever amnesty program - and, officials insist, its last - Louisiana recently concluded its fourth amnesty program in 16 years. At least 10 other states have offered amnesty twice.
"That creates all the wrong incentives down the road," says Steven Sheffrin, a professor of economics and the founder of the Center for State and Local Taxation at the University of California, Davis. "People may say 'I'll just take my chances that another amnesty will be offered.' "
Indeed, at the federal level, talk of a national tax amnesty died several years ago when a report by Congress's Joint Committee on Taxation pooh-poohed the effectiveness of such programs. The report concluded that, over time, amnesty would diminish taxpayer compliance.
Others question the basic fairness of amnesty. "Over time they have become a way to raise cash rather than necessarily constitute an opportunity to 'get right with the Lord,' so to speak," says Harley Duncan, executive director of Federation of Tax Administrators.
Law abiding taxpayers are angered by cases, such as one in Louisiana, in which a taxpayer paid off a $6.2 million tax bill, but was forgiven $4.1 million in interest and penalties. To make the laws more acceptable to the public and politicos, fines are often increased, even doubled, when the amnesty period ends.
Ohio avoided much of the controversy surrounding amnesty laws by limiting eligibility to delinquent taxpayers "unknown to the state." Those previously unknown to the tax system have essentially become registered in perpetuity. Mr. Zaino estimates previous 'non-filers' will add $5 million yearly to the state treasury.
While this restricted collections to net new money, the program only took in some $24 million. That figure runs ahead of initial projections of $17 million, it is a drop in the bucket compared with the Buckeye state's deficit last year, which swelled to $1.5 billion.
In Ohio, Zaino has reassigned staff in his department, allowing him to increase audit hours by 33 percent at no additional cost. And with a shrunken pool of targeted tax dodgers, enforcement efforts can be that much more focused. "I don't think Ohio's program would have been effective if I was not able to say that at the end of this amnesty I was going to bring a hammer down," says Zaino.