Improve state tax-collection system to help close budget gap

The numbers are staggering: California is facing a $14.5 billion budget deficit next year. But before we talk about cutting vital services, raising new taxes or selling state assets such as the Los Angeles Memorial Coliseum, let’s collect what we are already owed. The Legislative Analyst’s Office, the Franchise Tax Board and the Board of Equalization estimate that the state fails to collect an estimated $8.5 billion that it is owed each year.

The law-abiding taxpayers of California deserve a tax collection system that is fair. We need to do a better job of targeting corporations and individuals who avoid paying all or part of their state taxes. If we collected that money each year, we would be having a very different budget discussion in the Capitol right now.

We first heard about the tax gap from Local 1000 members who work in that Franchise Tax Board and the Board of Equalization. We researched their tips and were astounded to find that the state fails to collect $6.5 billion in income taxes each year, while $2 billion in sales and use taxes go uncollected annually.

This is just one suggestion that we received after we asked our members for their ideas on ways to make state government more efficient and effective. We explore the state’s tax gap in the first of a series of reports we are calling “The California Bottom Line.” We have posted our findings on a new Web site, http://thecabottomline.org, that will include other ideas about saving services by making government more efficient.

The governor said he wants to correct structural flaws that force the state into deficit spending when revenues fall. But we believe that if California were able to do a better job going after unpaid taxes, we could have a more accurate basis for evaluating the state’s long-term financial needs. These are taxes that are already owed to the state but are not being paid.

So far the results of several modest pilot programs suggest that a big push to crack down on uncollected taxes could raise billions. We believe that when it comes to tax enforcement, it’s time to stop studying and start collecting. However, the governor’s 2008-09 budget proposal would only reduce the tax gap by a small percent.

The Legislative Analyst’s Office has endorsed a variety of solutions for more effective collection of taxes owed California, including, targeting independent contractors, going after corporate non-filers and boosting resources to identify corporate and individual non-filers.

Last year, the LAO also urged stronger enforcement actions: “We recommend that the Legislature redirect some proposed budget-year spending on tax gap enforcement activities in order to increase their payoff in terms of General Fund revenues.” The LAO’s solutions require reallocating tax-gap efforts to focus more on enforcement and on strengthening penalties, and less on education; according to the LAO, “the state could get a bigger revenue bang for its enforcement buck.”

In addition to the LAO’s recommendations, we believe the state should consider an amnesty program that will bring in payments owed by taxpayers who want to avoid the brunt of new enforcement efforts. In 2004-05, the Voluntary Compliance Initiative brought in $1.4 billion from taxpayers seeking to avoid penalties by voluntarily paying taxes they had previously avoided through the use of abusive tax shelters. The Tax Amnesty Program brought in $4.8 billion from other taxpayers who used the opportunity to come into compliance with the provisions of tax law and thereby avoid penalties. Even though the revenue this program generated was from noncompliance over a few years, the size of the tax gap warrants reviewing this program again.

On Jan. 31, Local 1000 distributed several thousand copies of “The California Bottom Line” to state legislators, senior government officials, the news media and other organizations. Assemblymember Loni Hancock, D-Berkeley, liked it so much that she asked one of our members to testify at a Feb. 2 hearing on budget solutions she co-sponsored in Oakland.

 “We shouldn’t have to look at cutting critical services when so much tax money is not being collected,” Hancock said at the hearing.

“We need to look seriously at how the state can do a better job of collecting taxes.”