Local government property tax amnesty programs: structures and themes.

Author:Ross, Justin M.
Position::Report
 
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  1. INTRODUCTION

    Traditional tax amnesty programs represent an opportunity for taxpayers with delinquent or unknown liabilities to voluntarily report themselves to the authorities. In revealing themselves, tax evaders enter into a contract with the government that includes a waiver of any criminal charges, as well as usually some forgiveness of penalties and interest which had accrued against their liability. In the United States, these programs are typically viewed as a mechanism for generating revenue, while improving the tax compliance environment by making it easier for citizens living outside the tax system to (re)join the tax rolls. (1) There have been 117 tax amnesty programs executed by American states since the early-1980s, and countless local governments offering amnesty for liabilities accrued under other tax instruments, in addition to amnesty programs for other revenue sources like library fines and parking tickets. Only with rare exception, however, have the local government amnesty programs extended this forgiveness to delinquent liabilities on real property taxes. Just the past three years alone have been witness to cities like New York, Denver, Tuscon, New Orleans, and Cincinnati offering amnesty on unpaid taxes except those on real property. (2) The 1980's and 1990's each saw just one city in each decade offer amnesty on property taxes, but 26 such programs have been executed since 2000 across six states.

    If considering tax amnesty in its traditional role as a revenue generator and compliance device, it is not the relative lateness of local governments to administering these programs for unpaid real property tax liabilities that is surprising, but the fact that they have emerged at all. The administration of the real property tax (RPT) differs from other tax instruments in key ways relevant to the traditional purposes of amnesty programs. Unlike mobile taxpayers whose presence and true taxable assets may be unknown to the government, a property tax lien is assigned to the parcel of property whose taxable value is determined whenever the local government decides to conduct property reassessments. After decades of property tax administration, zoning, and federal registries for land and water regulations, local governments have detailed records of land titles and records for the properties within their territory. Since the tax holds first lien against the property in the event of any ownership exchange, the opportunity for non-compliance and evasion is extremely slim; Should an owner disappear or refuse to remit the tax, the government can seize and sell the property via tax auction. (3) In short, unlike other taxes the local government does not need to rely upon significant levels of voluntary compliance in order to collect the full RPT levy. As observed by Jensen in 1931 (supra note 17, p. 307):

    It should be a relatively simple matter to collect the [property] tax, once it has been extended on the roll and a proper warrant has made it a legally collectible claim. On paper, at least, the collector has adequate legal authority; the tax is usually prior to all other claims; barring fraud and illegality in the levy and assessment, nothing should stay the collection. In this light, an amnesty program for the real property tax is a curiosity, and with more than 100,000 American local governments it is tempting to neglect these few attempts as little more than random. A closer examination of these cases, however, is quite revealing of a wider array of rationales and institutional challenges than has been observed at the state level.

    The purpose of this paper is to provide an overview of relevant data and program structures of the RPT amnesty programs which have been observed thus far. These programs appear to have never been systematically studied or reviewed in the academic literature. After examining the features of the amnesty programs, a narrative analysis of existing archival public records is used to place these programs in the context of their environment at the time of the offering. This narrative analysis is pursued because the number of amnesty programs have been so few and far between that the data will not offer sufficient variation to draw very substantive econometric results. The narrative analysis, however, does reveal several themes which provide insight as to why these programs have been employed and how they are related to, yet differ from, their state level counterparts. The first theme discusses how these amnesties have fit in the context of financial management, where the program contributes to improving compliance, tax administration, and revenue. Also reviewed is how RPT amnesties have served as facilitators of policy changes, much like what has long been observed with state programs. Finally, the manner in which these programs have come to be repeated in some jurisdictions reveals a surprising cause for concern.

    Overall, the story of these programs reveal the possibilities offered by amnesty for real property taxes, as well as the potential dangers to long-term compliance and administration. To assist with comparisons between state and local amnesty programs, the next section provides background on state tax amnesty programs by summarizing relevant academic literature and providing some data on their features and recoveries. Section 3 then overviews the different programs which have offered amnesty on real property taxes in terms of their recoveries and structures. Section 4 provides the narrative analysis of themes that emerge from public statements, testimonies, minutes from council meetings, memos, press releases, and media reports. Since 19 of the 29 amnesty program have occurred in Massachusetts, Section 5 examines how they affected growth trends in property tax revenues and values. The paper concludes with a summary of lessons learned and considerations for policy makers.

  2. BACKGROUND ON STATE TAX AMNESTY PROGRAMS

    Before discussing the local property tax amnesties, it is worthwhile to review what is known from the experiences of American states, whose tax amnesty programs have been heavily studied in the academic literature. It is widely regarded that the early attempts in the 1980's primarily revolved around efforts to improve tax administration. (4) Mikesell (1986) observed that these amnesty programs were bundled with considerable post-amnesty administrative changes: increased penalties and interest, reclassifying tax evasion and delinquency as a felony rather than a misdemeanor, increasing the audit rate, and other enforcement initiatives. In fact, Mikesell (1986) speculated that the amnesty was a necessary political segue into a higher enforcement environment. Concurrently, surveys of tax administrators by Ross (1986) and Parle and Hirlinger (1986) likewise independently concluded that the focus of the amnesty programs were to bundle it with other reforms aimed at improving compliance and administration. In an empirical investigation of the amnesties in the 1980's, Dubin et al. (1992) found that declining enforcement from the federal government caused states to improve their own compliance efforts, and this was an important determinant of amnesty occurrence.

    American tax collections depend heavily upon voluntary compliance from the public, and critics in the 1980s were concerned that the tax amnesty represented a kind of shock to a system that seemed to be operating efficiently in this regard, at least when compared with other nations. As a result, the preeminent controversy of using amnesties to improve tax compliance revolved around the concern that it would backfire and reduce compliance. One possibility was that large recoveries in tax amnesty programs would reveal to previously compliant taxpayers that evasion was a quite successful enterprise. Secondly, taxpayers may not believe that tax amnesties would be a one-time event, and that they could once again evade or become delinquent until the next amnesty period. Finally, perceived unfairness of amnesty for evaders might erode the "tax morale" among the previously compliant that seemed to be an important contributor to the high rates of voluntary compliance. In this light, scholars have pursued a variety of approaches to determine whether or not amnesties have any effect on long-run post-program compliance. This literature is far from settled due to the difficulty of identifying the effects, but the preponderance of evidence leans against finding any positive compliance effects resulting from these programs (Joulfaian, 1989; Alm et al., 1990; Alm and Beck, 1993; Christian et al., 2002; Luitel and Sobel, 2007; Mikesell and Ross, 2012).

    Amnesty programs made fewer appearances in the 1990's, but returned voluminously in the millennium decade. As Table 1 indicates, more than half of all amnesties that have ever occurred appeared after 1999, and from 2000 to 2010 there were more amnesty programs offered than there were states in the union. If taxpayers suspected amnesties would not be "one time only events," they had confirmation of such by 2010. The timing of these programs also coincided with the fiscal stress induced by the two recessions which bookended the decade. Furthermore, Mikesell and Ross (2012) studied the evolution of the amnesty program features over the decades and concluded that the purpose of the amnesty had shifted from a tool for improved tax administration to one for revenue recovery. In fact, Mikesell and Ross (2012) argue that many of the revenue generating features were ones that were actually in conflict, rather than complimentary to, the existing state tax administration.

    The lack of long-run improvement in compliance and threatening the existing norms in tax administration is somewhat concerning, given that the fiscal return to state amnesty programs is not particularly sizable, as demonstrated in Table 1. While state tax amnesty recoveries have been large in volume, on average collecting $87.2...

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