Monday, December 22, 2008

Tax Amnesty

State after state is facing a disastrous drop-off in tax revenue because of the stock market collapse, the housing foreclosure crisis, and the recession. As a result, many lawmakers are being forced to think outside the box in order to develop creative solutions to close current and future projected budget deficits. One solution that seems to be gaining momentum is tax amnesty. Under a tax amnesty program, individuals and businesses would be allowed to pay their past-due tax bills with little or no penalties or interest.

Three years ago, Indiana raised about $245 million dollars over three months by allowing individuals and businesses to clear their overdue tax obligations without penalties of any sort. Other states inspired by Indiana's success, are either experimenting with or discussing their own amnesty programs,

Nevada for example raised 41 million dollars in just under four months this year while giving up 14 million dollars. The result of Nevada's tax amenesty is that they earned approximately $3 for every $1 given up in penalties or interest. Oklahoma, generated about twice as much as it expected from its offer of amnesty, raising $82 million through its 90-day Clean Slate program for businesses and individuals. New York has a program under way, and Connecticut and Massachusetts are drawing up theirs. California debated one before rejecting it in favor of stiffer penalties. Delaware's incoming governor campaigned on the idea. A similar program is being considered for Louisiana when its lawmakers return in April.

New York, which has a $1.5 billion deficit, began a limited amnesty last January that covers income, corporate and sales taxes. The state has collected $11 million so far and hopes to take in $30 million.

Connecticut Gov. Jodi Rell has warned that the state faces nearly $6 billion in deficits over the next two fiscal years. The state is hoping to generate $40 million by instituting a 56-day tax amnesty program next spring. It will let taxpayers pay their late state taxes without penalty, and with a 25 percent reduction in interest.

Many states are reluctant to offer amnesty, arguing that its rewards cheaters, discourages honest taxpayers and poaches revenue the states will collect in the future — especially as they improve the databases they use to catch delinquents. They worry, too, that people will hold back on their taxes and simply wait for the next amnesty. I guess this is what the lawmakers in California were thinking since they rejected a tax amnesty program as a way to generate tax revenues while the state is on course to run out of money in 60 days.

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