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Michigan Tax Amnesty Program Collects $76 Million, at What Cost?

2 min readBy: Frederick Hubach

According to recent data, Michigan’s 2011 state tax amnesty captured approximately $76 million in unpaid taxes. Lasting for only 45 days, the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. amnesty program allowed delinquent taxpayers to submit unpaid taxes (plus interest) with no penalties or threat of criminal prosecution. Despite falling short of its $88 million goal, Michigan State Treasurer Andy Dillon remarked, “I am very pleased with the success of the 2011 Tax Amnesty Program.” The recent amnesty was the third of its kind in the state since 1986.

Over the last three decades, tax amnesties have become increasingly popular with state governments. In 1982, Arizona became the first state to hold a tax amnesty program. Since then, 44 other states (in addition to the District of Columbia) have held their own amnesties. In total, approximately 115 general tax amnesties have been enacted since their inception.

Tax amnesties are commonly praised for the revenue that they collect. However, these one-time cash injections come at a high cost. Amnesty programs distort healthy incentives by undermining taxpayer respect for the law and reducing the cost of tax evasion. The more frequently amnesties are held, the more reinforced these effects become. To avoid these consequences, repeated amnesty programs should be avoided. However, this rarely happens. Legislators often advertise tax amnesties as one time deals, only to endorse similar programs several years later. Of the 46 states that have held tax amnesties, 22 offered similar amnesties within 10 years of each other.

Additionally, the debate over tax amnesties often overlooks systemic problems within state tax codes. As we have said in the past,

Often lost in the amnesty issue is the fact that much of tax non-compliance is due to tax complexity. Is it difficult to overstate the level of complexity in both federal and state tax laws. While some individuals and businesses knowingly cheat on their taxes, the complexity of our tax laws ensures that many people will be non-compliant without even knowing it.

Complexity within the tax code increases compliance costs for law abiding citizens and hinders enforcement by government officials. In short, tax amnesties do not fix the “tax gapThe tax gap is the difference between taxes legally owed and taxes collected. The gross tax gap in the U.S. accounts for at least 1 billion in lost revenue each year, according to the latest estimate by the IRS (2011 to 2013), suggesting a voluntary taxpayer compliance rate of 83.6 percent. The net tax gap is calculated by subtracting late tax collections from the gross tax gap: from 2011 to 2013, the average net gap was around 1 billion. .” They are merely a retroactive response to taxpayer noncompliance. Broadening the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. as part of comprehensive tax reform would help to alleviate the fundamental problems of high enforcement costs and noncompliance that amnesty programs are created to address. However, until states start proactively embracing reform, tax amnesties will likely remain a popular, albeit hazardous revenue tool.