Tax Amnesty: Hidden Costs Outweigh Benefits

February 18th, 2003 by Leave a Comment

By Morgan Smith

During the next few weeks, Georgia’s legislators will be looking for creative solutions to the state’s budget crisis. One possibility being considered is a tax amnesty, which is a tool many states have turned to in recent years. While the prospect of easy money can sound attractive, a closer look suggests that tax amnesties are not usually the right answer and should not be an option for Georgia.

The first problem is that tax amnesties typically bring in much less incremental revenue than is reported. States like to announce how much revenue comes in the door during the amnesty period, but usually fail to account for the fact that most of these taxes would have been collected in due course. Many taxpayers who take advantage of amnesties have already been identified by tax administrators as either delinquent or under-reporting. In these cases, it’s likely the taxes and penalties due would have been collected by the state eventually. While a tax amnesty can accelerate the collection process, the bulk of these revenues clearly aren’t “found” money.

In addition, the amnesty effort itself can have significant costs. The state’s tax administrators must be diverted from their usual tasks to handle the inflow of paperwork and queries from amnesty participants. In some states, it has taken months to work through the backlog. Most amnesties also require an aggressive publicity campaign to spread the word, which adds up to more spending and more demands on personnel.

Another drawback is that amnesty programs send the wrong message to taxpayers. Amnesty for some tax delinquents is inherently unfair to the vast number of law-abiding taxpayers who follow the rules. And while amnesty may entice some former non-filers to join the tax rolls, overall compliance can actually be diminished. If taxpayers get the idea that amnesties are somewhat regular possibilities, the state effectively reduces the disincentives to cheat. Taxpayers who are on the fence about compliance can become less willing to pay up on their own, which compromises the state’s future tax revenues.

Georgia’s last tax amnesty was offered in 1992, which makes it too soon to consider another such program. Repeated amnesties only exaggerate the deterioration in compliance and enforcement. States can also become addicted to the apparent revenue infusion while ignoring the bad news about the true bottom line. New York and New Jersey have each offered three amnesties during the past 15 years, with the effect that some tax avoiders now plan ahead on the presumption that an amnesty will be available. This is not a model Georgia should try to emulate.

In fact, the best amnesty programs are committed to the premise that they represent a one-time, never-to-be-repeated opportunity. Ohio’s recent program was a good example, since much of the state’s publicity emphasized the uniqueness of the amnesty. Nearby Kentucky and South Carolina have each held two amnesties, but even these programs were widely separated, by 14 and 17 years, respectively.

At least 19 states, Georgia included, have demonstrated sufficient restraint to offer only one tax amnesty over the past 20 years. This precedent should not be overturned lightly. It may be that another amnesty would be appropriate at some point in the future. In that event, the relative rarity of prior programs will greatly enhance the amnesty’s impact and the amount of revenues collected.

A better alternative for the time being would be to increase funding for more creative, targeted enforcement efforts. Several states, including North Carolina and Louisiana, use their revenue department Web sites to publicize lists of major tax cheats. A similar initiative involves mass mailings to known delinquents or non-filers, encouraging them to make contact with tax administrators to resolve their status. Such low-tech solutions are relatively cheap, and can generate surprisingly robust results. The best part about these programs – apart from their simplicity – is that they emphasize the principles of compliance and responsibility. Tax amnesties, on the other hand, set the usual rules aside for the purposes of a quick budget shortcut.

There can be good reasons for offering a tax amnesty, but an easy revenue windfall isn’t one of them. Giving tax cheats a break is likely to do little to help the state’s budget, once the explicit and implicit costs are considered. In addition, the theory behind such programs contradicts Gov. Perdue’s new emphasis on a more ethical and responsible state government. Rather than rewarding a handful of tax delinquents, Georgia should sponsor more creative enforcement efforts, and should find other, less disruptive ways to solve the larger budget dilemma.


Morgan Smith is a freelance public policy analyst and an adjunct scholar with the Georgia Public Policy Foundation. The Foundation is an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.

© Georgia Public Policy Foundation (February 18, 2003). Permission to reprint in whole or in part is hereby granted, provided the author and her affiliations are cited.

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