Tax amnesty programs and voluntary compliance initiatives: a way to mitigate declining state revenues.

• Author: Weinreb, Adam Stuart

[ILLUSTRATION OMITTED]

SINCE 2000, MORE THAN HALF OF THE states have offered tax amnesty programs one or more times (see Federation of Tax Administrators, "State Tax Amnesty Programs" (July 2007), www.taxadmin.org/ fta/rate/amnestyl.html). The programs allow taxpayers to "come clean" and report and pay delinquent tax liabilities. They are popular with taxpayers because they provide a waiver of most penalties and, in some cases, some or all of the interest that otherwise would be assessed. States like the programs because they add taxpayers to the rolls and inject much-needed revenue into state coffers without the need for costly audits that may run for an extended period of time. Despite these benefits, there can be serious ramifications for taxpayers, not the least of which is the need to pay significant sums in short order. In addition, failure to pay qualified delinquencies during the amnesty period can lead to significant post-amnesty penalties in certain jurisdictions. States also face challenges by offering tax amnesty given the need to provide balance for taxpayers currently complying with tax laws while adding new taxpayers to the rolls.

The rise in amnesty programs appears to be tied to the country's economic health, as evidenced by the frequency of amnesty programs over the past decade. Most of those programs were offered in 2001-2003, just as the country was coming out of a recession. Only a handful of states, including New York, Ohio, Rhode Island, and Texas, offered tax amnesty programs from 2004 through the end of 2008, most likely because state budgets generally were improving during those years. However, as the recent economic downturn strains tax revenues, amnesty programs have resurfaced as an immediate fix to the problem. By way of example, Alabama, Arizona, Connecticut, Massachusetts, New Jersey, and Virginia will offer tax amnesty in 2009; other states, including Louisiana, Maryland, New Mexico, and Vermont, have proposed (as of this writing) tax amnesty, and it is expected that other states will follow.

A look at the projected fiscal outlook for many states and the potential for tax amnesty programs to raise significant revenues is key to understanding why more states may enact tax amnesty in the near future. According to a November 2008 study by the Center on Budget and Policy Priorities, at least 45 states face budget shortfalls for this and/or next year, and severe fiscal problems are likely to continue after that (see McNichol and Lav, Center on Budget and Policy Priorities, "State Budget Troubles Worsen" (updated 3/13/09), available at www.cbpp.org/ cms/?fa=view&id=711). The combined budget deficits for the remainder of fiscal year 2009 and fiscal years 2010 and 2011 are estimated to total more than $350 billion.

As reported by the Federation of Tax Administrators, tax amnesties have generated significant revenues in some states. For example, New Jersey raised more than $275 million in 2002, and Illinois and New York State raised more than $530 million and $580 million, respectively, in 2003 via their tax amnesty programs. Although these programs were among the leading revenue raisers nationwide, in the aggregate the programs raised millions in tax revenues for the states. Even Connecticut, which, according to a press release by Governor Rell, expects to raise only $40 million during its 2009 amnesty program, sees tax amnesty as an opportunity to bring much-needed revenue into the state ("Governor Rell Announces Deficit Mitigation Plan" (10/21/08), http://www.ct.gov/governorrell/cwp/view.asp?a=3293&q=425462).

However, not everyone is enamored with amnesty. As reported by Tax Analysts in State Tax Today, Tennessee revenue commissioner Reagan Farr called amnesty programs "gimmicks" and implied that amnesty could "reduce public respect for the tax laws" (see Setze, "States Offering Amnesties in Wake of Fiscal Crisis, but at What Price?" 2009 STT 50-1 (March 18, 2009)). The article quoted a study by Luna, Brown, Mantzke, Tower, and Wright ("State Tax Amnesties: Forgiveness Is Divine--and Possibly Profitable," State Tax Notes 497 (August 21, 2006)), which said that "there was widespread criticism from law-abiding taxpayers that frequent amnesty programs unfairly reward tax evaders," and a fiscal note attached to an amnesty proposal in New Mexico, which said that "[f]requent amnesty periods may indirectly communicate a message to taxpayers that they do not need to comply with the Tax Administration Act because, potentially, another amnesty period may be approved. It is not known how frequent is too frequent."

In addition to more general tax amnesty programs, a growing number of states occasionally offer voluntary compliance initiatives (VCIs). Unlike general tax amnesty programs, which apply to a broad category of taxpayers and a wide range of taxes, VCIs target taxpayers involved in tax...