Oklahoma revenue officials are celebrating the fact that their recent tax amnesty has brought in over $81 million in previously unpaid taxes, twice the goal. 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. payers had until November 14 to pay, and in return had penalties, interest, and fees waived.
Tax amnesties are a favored tool used by states in a crunch to raise some quick money. The revenue raised is at least theoretically money that would otherwise go uncollected (the so-called “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 Internal Revenue Service (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 tax gap was around 1 billion. “), and there’s a likelihood that a tax cheat who pays once will continue paying in the future. But there are strong downsides to tax amnesties, and judging their success should go beyond looking at the amount of money raised.
If a state does amnesties frequently enough, people will come to expect them and that encourages non-compliance. Oklahoma just had a tax amnesty in 2002, and waiving all the penalties and fines can leave law-abiding taxpayers feeling a little left out. (The Oklahoma Supreme Court declined to hear a case alleging that revenue officials do not have the power to suspend the imposition of interest and penalties.)
Also, our 1985 paper on tax amnesties suggests that compliance in amnesties is usually brought about by increased enforcement and publicity, not the amnesty itself. Enforcement costs and revenue presumably have some trade-off considerations.
My colleague Alicia Hansen put it well:
[N]ot all tax delinquency is intentional. The income tax code is so complex that even well meaning, law-abiding individuals may not realize they are not paying their share. What we wrote in 1985 holds true today: if lawmakers decide to implement tax amnesty programs, they should be accompanied by fundamental tax reform that makes the tax code simpler and easier to comply with.