Tax Amnesty Programs: Source of Quick Cash for States
Policy + Politics

Tax Amnesty Programs: Source of Quick Cash for States

Many states are on the hunt for cash—and quick. 

To fill their coffers and avoid hiking taxes or enacting new ones, states are flocking to taxpayer amnesty programs, which encourage delinquent taxpayers to pay up in return for escaping penalties and interest, in some cases.  Pennsylvania Governor Ed Rendell announced last week that the program had raised $261 million as of the June 18 deadline, $70 million above the state’s goal.

There are some catches, though. Most states require participants to stay up-to-date with their taxes for several years in order to reap the benefits of the program. The window to submit returns tends to be short, usually two to six months, depending on the state. If those deadlines are missed, filers are slapped with additional penalties on the final tax bill. 

In most cases, the amnesty applies to income tax, sales tax, corporate tax, and gross receipts (where there’s no state tax, as in Nevada, amnesty applies primarily to sales taxes.) Twelve states held amnesty programs in 2009, and thus far in 2010, Pennsylvania, Nevada, New York, Maine, and New Mexico have participated. Forty-six states as well as the District of Columbia enacted one or more amnesty programs between 1982 and March 2010, according to data from the Federation of Tax Administrators. FTA data also show that amnesties tend to be particularly popular during and following recessions: Amnesty programs ticked upward in and around the early 1980s, and again in 2009, after the 2008 economic collapse. 

Pennsylvania’s success may be due in part to cryptic ads like this one.   Either way, now that the amnesty period is over, Rendell is planning to crack down on those who did not participate by adding an extra five-percent penalty onto what is already owed and asking the state legislature to boost the state’s fiscal 2010-2011 budget to help the cause: It would direct $2.3 billion to the enforcement of tax collection, he said in a statement.

‘Right Now We Really Need Money’
Amnesty programs mean the states must choose between maximizing the amount of money they bring in over time or collecting revenue almost immediately, says Kim Rueben, senior fellow at The Urban Institute. “You’re deciding that ‘right now we really need money,’ and you’re going to get revenues up for the next three or four years,” Rueben says. “The downfall is that you’re not getting the money from penalties and interest, so you’re basically giving people who haven’t followed the law a tax-free loan.”

While amnesty programs are effective in collecting cash almost immediately, they do encourage noncompliance if used too often, says Joseph Henchman, tax counsel and director of state projects at The Tax Foundation, a think tank also in Washington, D.C. “It certainly leaves compliant taxpayers with a bad taste in their mouth,” he says. “They see people who have skated around the law and cheated on their taxes not suffering the consequences because the states are in a rough revenue situation.”  

But while these programs tend to reward those who don’t file their taxes or who underreport them, here’s the result: Once taxpayers come clean to state authorities, they’re more likely to get on the federal government’s radar. “If you’re not in the system, suddenly appearing in the system through a program like this does set off a red flag,” Rueben says. “If you haven’t paid income taxes your whole life, the government isn’t necessarily tracking you down. But if you pay every other year, you can be pretty confident that both the state and federal governments are going to send you a message that says, in effect, ‘Hey, what happened in 2007?’”

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