Tax amnesty can be an effective way for a taxing authority to quickly fill its coffers, clear a lot of names off the delinquency list, and help balance the budget. States do it from time to time, though critics warn that it can undermine regular collections if taxpayers begin to sense a pattern.
The most recent state to offer taxpayers amnesty is Pennsylvania. The program began April 26 and runs through June 18. With $2.1 billion in unpaid taxes owed by residents and nonresidents, Governor Ed Rendell is hoping to collect at least $190 million by the time the program ends.
The carrot and the stick
For those who come forward to file missing tax returns and pay delinquent taxes, the Pennsylvania Department of Revenue will only hold them responsible for amounts owed dating back to the last five years. In addition, the program waives all penalties and half of the interest owed. Considering that interest and penalties often add up to more than the tax itself, this can be a substantial benefit to partakers.
That “forgiveness” is the carrot to entice delinquents to pay up. But there is also a stick for those who don’t. Once the program ends, a 5 percent non-participation penalty will be added to all unpaid balances. For amnesty participants who lapse into delinquency again within two years of the program’s end date, all penalties and interest that were waived through the amnesty will be reinstated.
Gov. Rendell welcomes delinquent taxpayers to participate, but he also wants to make it clear to the general population that these people are not getting off easy.
“The vast majority of businesses and individuals who owe Pennsylvania taxes – 97 percent – obey the law by paying in full and on time,” Rendell told reporters. “Tax amnesty is a limited opportunity for tax scofflaws to settle up, and for taxpayers who have been flying under the radar to come forward. Although the tax amnesty program offers a break on the penalties and interest due, make no mistake – tax delinquents will still pay more than they would have if they’d paid their taxes on time.
“We can’t afford to ignore people and businesses that duck their tax obligations and break the law,” said Rendell. “They’re not beating the system; they’re only passing the buck to honest Pennsylvania taxpayers who already do the right thing.”
Here is how the back taxes break down, according to the Rendell:
- 93,600 people and businesses that owe money to Pennsylvania reside in the nearby states of Delaware, New York, Maryland, Ohio, or West Virginia.
- More than 62 percent of the back taxes that qualify for Pennsylvania’s amnesty program are owed by businesses in the form of corporate taxes, sales taxes, and employer withholding taxes.
- 33 percent is owed by individuals for personal income tax.
To kick-start the amnesty program, over a million delinquent taxpayers (including more than 202,000 out-of-state businesses and individuals) received notices informing them of the online-only opportunity, available by going to www.PATaxPayUp.com.
Pennsylvania’s Department of Revenue has been creative in getting the word out, but some critics find it less than amusing. Take, for example, the print ad which speaks of the “imminent death of Mr. Nice Guy” once the program expires. It includes the warning “But after June 18, well, things could get complicated.”
In one TV spot, as the camera zooms through clouds to focus on one Pennsylvania home, a narrator says:
Your name is Tom ... You live just off of 5th Street ... Nice car, Tom. Nice house. What's not so nice is you owe Pennsylvania $4,212 in back taxes. Listen Tom, we can make this easy. Pay online by June 18th and we'll skip your penalty and take half off your interest because Tom, we do know who you are.
Dan Mitchell, a senior fellow at the Libertarian Cato Institute, told Fox News he finds the ads offensive.
"Clearly the government is trying to intimidate and threaten people, which I don't think is something government should do,” Mitchell said. "These Pennsylvania ads are irritating, a waste of money, and [is a form of] government bullying", he said.
Stephanie Weyant, spokeswoman for the Pennsylvania Department of Revenue, told Fox News the ads are “intentionally edgy.”
"Obviously with advertising we're trying to cut through the clutter and motivate tax delinquents...to pay up in a very short time. Our budget in Pennsylvania depends on it,” said Weyant.
Irritating and intimidating? Maybe. Effective? Yes.
The last time the state did this was 14 years ago, in an amnesty program that began in October 1995 and ending in January 1996. The state collected approximately $93 million from 63,000 taxpayers in 90 days.
As for this effort, the Philadelphia Business Journal reported that four days into the 54 day program, the state had received 10,062 applications, completed or in process, representing $12.1 million in back taxes. The largest single payment so far has been $172,593.07 in personal income tax.
“Because of the tremendous response in the first couple of days of the tax amnesty program, the department has tripled the number of people answering the phones, and we are offering customer service for the next two Saturdays,” C. Daniel Hassell, state revenue secretary, told reporters.
So surprising was the response, in fact, that in the first two days of the amnesty program, applicants were met with long, frustrating waits and many errors. Peter Calcara, vice president of governmental relations for the Pennsylvania Institute of Certified Public Accountants, told reporters at Philly.com that this is largely due to the revenue department’s antiquated computer system, which is 30 to 35 years old.
One taxpayer contacted by Philly.com said he had a harrowing few days after he was notified over the weekend that he owed back taxes. The notice didn’t say how much he owed, and there was no way to find out until Monday morning when the amnesty program began. After a long, worrisome weekend, it turned out he owed $24 from 2002.
The City of Brotherly Love joins in
The city of Philadelphia is running its own amnesty program, concurrent with the state’s program. Like the state plan, delinquent taxpayers who pay up will have all penalties forgiven as well as half the interest owed. This applies to taxes paid between May 3 and June 25. The Philadelphia Business Journal said the city hopes to net $25 million to $30 million.