Commentary; Posted: 3/21/07
Is tax compliance the golden egg?
T.W. Budig
ECM Capitol Reporter
One of the charms of a theoretical legislative session is the appealing abstractness.
Unaffordable spending can be considered, taxes raised, because until Gov. Tim Pawlenty’s veto pen strikes paper the parameters of the session are as free-floating as hope and desire.
Still, even the imaginative or willful must recognize some boundaries. And one seems to exist in the area of tax compliance.
In recent years lawmakers have seen outstanding return on investment from tax compliance initiatives undertaken at the Department of Revenue.
Back in 2003 the Legislature gave the department $10 million to sic their auditors and collections people on taxpayers and businesses who owed taxes but hadn’t forked over the dough.
It has been suggested Minnesotans owe as much as $1 billion in unpaid taxes, though Revenue Commissioner Ward Einess points out that the state’s tax gap is the lowest of any state that has done a tax compliance study — it’s substantially smaller than the IRS’s, for that matter.
“All in all, Minnesota citizens do their level best at paying their fair share (of taxes),” Einess said.
Anyway, department auditors adjusted their visors and went to work in 2003.
By the time they finished, they had surpassed the goal of collecting $60 million in unpaid taxes and had brought in $97 million.
That’s about a 10 to one return.
Two other subsequent compliance efforts also yielded excellent returns, though at a diminishing rate.
Einess estimates by the time the department’s current compliance efforts wind down, its auditors and collectors will have brought in about $110 million in unpaid taxes.
That’s still a robust six to one return on investment.
If tax compliance is the golden goose, will squeezing the bird harder yield a golden bar instead of an egg?
Some lawmakers suggest it’s possible.
Indeed, legislation has been introduced that would set a goal for the Revenue Department of collecting $200 million in unpaid taxes.
In the theoretical session to date, this tax compliance money in fuzzy and more solid ways has been drawn into the budget discussion.
More than drawn in.
Relied on.
But Einess warns against irrational exuberance.
Simply to carry out his boss’s — Gov. Pawlenty — current proposed tax compliance initiative to snag $50 million will require the Revenue Department to hire as many as 70 new employees — mostly auditors, explained Einess.
A $200 million compliance target goal would mean hiring as many as 250 new employees — the labor pool can’t provide them and beyond that the department has no place to put them, argued Einess.
“We would have no level of confidence we could deliver $200 million in the two-year biennium period,” Einess said.
“Our level of confidence would be absolute zero,” he said. Still, Einess cites no specific amount that would mark the frontiers of tax compliance collection.
“There is a ceiling,” he said. “We don’t know what that is.”
Rep. Loren Solberg, DFL-Grand Rapids, House Ways and Means chairman, also offered no ceiling amount.
“I think we want to be very aggressive,” he simply said of collecting unpaid taxes.
As for the $1 billion in unpaid taxes often cited by lawmakers, Einess said the sum was extrapolated from IRS data and snagging isn’t a simple process.
“It’s not that we know Person X, Person Y out there owes exactly a thousand dollars and we just go out and ask for it and collect it,” he said.
Einess is pushing for $20 million in funding for an integrated tax system program for the Revenue Department that would put at auditors’ fingertips where the most fruitful audits might be found.
“Right now it’s kind of trial and error,” Einess said.
One problem the initiative might face at the Legislature is that it would not be up and running soon enough to capture additional unpaid taxes for use in the upcoming budget cycle, Einess points out.
However abstract the budget discussion, it tends to return to the immediate.
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