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Tax Amnesty in Iowa

3 min readBy: Alicia Hansen

Iowans who have not paid their state taxes will soon have a chance to atone, thanks to a new 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 in Iowa. From the Sioux City Journal:

Gov. Chet Culver signed a bill that allows a two-month tax amnesty, a period in which delinquent taxpayers don’t have to pay any penalties and only have to pay half of the interest they owe. The Iowa Department of Revenue estimates it will receive $53.9 million in payments, including $16 million that wouldn’t be paid otherwise.

The only other amnesty in Iowa history was in 1986, when taxpayers forked over about $37 million, with the majority of the dollars, $21 million, coming from corporate taxes. Individual income taxes accounted for just $5 million. The rest was sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. , use tax or other taxes.

But not everyone is happy about this program:

The bill passed the Legislature, despite strong opposition from House Republicans. House Minority Leader Christopher Rants, R-Sioux City, said the bill is unfriendly to law-abiding taxpayers.

“With record revenues, the Democrats couldn’t find it in their budget to give anybody a tax break, except for the people who didn’t pay them,” he said.

As Gov. Culver was signing into law his state’s amnesty program, we were posting a working paper from our archives on the same subject. In 1985, in a paper titled “Why Not Amnesty?,” the Tax Foundation wrote:

An oft-stated argument against amnesty is that it sends honest taxpayers the wrong signal—that you can get away with tax cheating. The IRS Commissioner never fails to emphasize this. Not too long ago, of course, the IRS was extremely reluctant to admit that there was any significant tax evasion problem and to attach any numbers to it. Now, it is readily conceded that we have uncollected taxes in the legal economic sector on the order of $100 billion—a lot of it probably beyond the reach of compliance measures no matter how sophisticated.

The states with successful amnesty programs claim that regular taxpayers don’t object to letting the cheaters and delinquents off the hook on a one-tine basis if they still must came up with all back taxes and interest. (Some amnesties, however, have allowed partial interest forgiveness.) If a national amnesty were to be seriously considered, logically it should be in conjunction with major tax reform stressing simplicity and fairness, at least in the individual sector. The “carrot and stick” would seem to work best with a fresh start on the whole system.

Of course, today’s tax gap is much higher than the 1985 figure. It’s no wonder that state and federal lawmakers see the appeal in tax amnesty programs to collect large sums of unpaid taxes. However, not 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.