Broke States Want Unpaid Taxes ... Now

State eNews Issue #43 | March 31, 2010

States want tax delinquents—whether businesses or residents—to get right with their departments of revenue. States are getting serious about collecting millions in back taxes because, now more than ever, they are desperate for cash.

“Obviously this is related to the cash crunch going on and states are desperate for this revenue,” said Sujit CanagaRetna, senior fiscal analyst with The Council of State Governments Southern office, the Southern Legislative Conference. “States are trying to recoup as much as they can by targeting these so-called tax cheaters.”

In Georgia, perhaps the most aggressive of the proposals across the country, is House Bill 1188. The bill would provide law enforcement powers to certain revenue department officials working on tax fraud and tax theft cases.

The aggressive approach to collect back taxes is a first among states, according to CanagaRetna. “That’s quite a step,” he said.

States are getting aggressive. Minnesota is stepping up residency audits to make sure part-time residents file and pay taxes in the state, while New York over the last few years has been pursuing more tax audit cases, according to CanagaRetna. Over the past two years, the number of active audit cases rose from 700,000 to 1.2 million. New York is going after the whole gamut of tax delinquents, from the high-flying Wall Street types to the local convenience store owner.

So why wait until now to get serious about tax delinquents?

“I think what it is in terms of revenue situation, you are literally turning over sofas and looking for coins that got stuck in there,” CanagaRetna said. “This could be politically sensitive too, you’re going after major corporations. That’s stepping on some political toes as well, maybe during those ‘good years’ people are less likely to do that.”

But the good years are gone and states are also trying to lure folks to pay back taxes by offering to waive penalties and interest—those are the tax amnesty programs. According to CanagaRetna, 14 states have offered tax amnesty programs in 2009 and 2010.

The Massachusetts Department of Revenue announced a $104 million tax amnesty program this month to get certain businesses owing taxes to pay up now. The program, authorized by the legislature, will only last for two months and will waive penalty fees for corporations owing back taxes if those taxes are paid in full by June 1.

The program applies to more than $408 million in back taxes owed by corporations, and the state could collect more than $304 million if those taxes were paid in full, minus the penalties, according to the Worcester Business Journal.

Pennsylvania will launch a similar 54-day tax amnesty program April 26, where all penalties and half the interest will be waived for businesses and residents who pay off delinquent taxes accrued through June 2009, according to the Associated Press.

The state expects the move to generate a spike in tax collections, generating $190 million to help offset state spending in the fiscal year beginning July 1, AP reports. Pennsylvania got the idea from New Jersey, where a similar tax amnesty program brought in a record $725 million in six weeks, the AP reports.

But these aggressive tax proposals and amnesty programs to lure folks to pay back taxes are not all perfect cures to broken state budgets. New York proved that with its penalty and interest discount—nicknamed the PAID program—that began in December and ended March 15. The program slashed penalties and interest if back taxes were paid in full by the deadline.

But the state so far has collected only $45 million, $200 million short of what the state projected the program would rake in, according to The Business Review in Albany.

Some of these amnesty programs have met with harsh criticism in the business world, where those in the business community in New York are calling the program a “money grab,” according to The Business Review.

But CanagaRetna doesn’t believe the movements to more aggressively pursue those who owe back taxes will do much in the way of hurting state’s business climates.

“I don’t think that’s going to be a major reason for a company to either relocate or locate into the area,” CanagaRetna said. “Most organizations are trying to do the right thing … if that’s the case, then you have nothing to fear.”

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