Analysts Are Skeptical of Ueberroth’s Tax Amnesty

Gubernatorial candidate Peter V. Ueberroth’s proposal to close California’s predicted $8-billion budget gap largely through a tax amnesty drew wide skepticism from policy analysts Thursday who dismissed his projection of a $6-billion windfall as overly optimistic, even unfathomable.

“It sounds like a number completely out of the blue to me,” said Don Straszheim, former chief economist for Merrill Lynch who runs the Straszheim Global Advisors research firm in Santa Monica.

“I think it would be highly risky to base a state budget on some massive revenue influx from a tax amnesty,” Straszheim said.

A California Franchise Tax Board analysis of a proposed tax amnesty last year estimated the state would gain about $6 million -- one-thousandth of Ueberroth’s estimate.

According to Ueberroth’s campaign strategist, Dan Schnur, the proposal is based mainly on an estimate by San Diego supply-side economist Arthur Laffer, who predicted in June that a general income tax amnesty could raise $100 billion for the federal government and $50 billion for state and local governments.

Ueberroth’s advisors took that nationwide number and broke out California’s pro-rata share, Schnur said.

A congressional estimate in May said the federal government loses $60 billion a year in uncollected taxes.

Schnur defended Ueberroth’s higher estimate after a media appearance Thursday in the heart of Silicon Valley, but said the issue remained “largely unexplored territory.”

The nuts and bolts of the proposal -- from the time frame covered to the scope of taxes involved -- also have yet to be worked out.

“This is based on the same kinds of estimates that the budget is based on,” Schnur said. “No one will know how much will be raised until it’s tried.”

Schnur said the Franchise Tax Board’s $6-million estimate reflected a state-only amnesty, which would not have much effect on tax scofflaws.

With a simultaneous federal amnesty, Ueberroth’s estimates would be reasonable, he said.

“If you don’t get the federal government to cooperate, then it’s not going to raise anywhere near the same amount,” Schnur said.

“No sane taxpayer is going to accept amnesty from the state government if the federal government is going to be at his door the next morning,” he said.

Yet the political hurdles facing legislative passage of such a tax amnesty are huge in both Sacramento and Washington, said Alan Auerbach, a professor of economics and law at UC Berkeley.

“I don’t think he’s going to succeed, so I think it’s moot,” Auerbach said.

The tax amnesty proposal is the linchpin of Ueberroth’s plan for balancing the budget, and is based largely on estimates put forth by Laffer in a Wall Street Journal article in June.

“We have intentionally developed figures that are much more cautious, much more conservative, than those that Mr. Laffer projected,” said Schnur, adding that the Laffer numbers would translate into $8.5 billion of additional tax revenues for California.

Laffer, whose work has often been dismissed by economists who find fault with his supply-side theories, could not be reached for comment.

Budget analysts said they found little merit in the numbers put forth by either Laffer or Ueberroth.

Jean Ross, executive director of the California Budget Project, which researches the effects that budget decisions might have on low-income Californians, said Ueberroth’s estimates ran much higher than other estimates of unreported income.

Ross said the state expects about $33.6 billion in personal income tax revenue this year and another $7 billion in corporate income tax.

Against that backdrop, Ueberroth’s estimate of $6 billion assumes a massive illegal economy “that just doesn’t make sense to me.”

“I’ve heard estimates that there is about $1 to $2 billion of revenue that escapes taxation due to the underground economy,” Ross said.

“California is considered to be one of the best tax-administered states in the country, one of the most effective.”

Yet if an amnesty is granted and Ueberroth’s estimate of uncollected taxes is correct, Auerbach said, “you have to get a very big chunk of what’s being missed. I think that’s very unlikely.”

While an amnesty might encourage some tax cheats to ‘fess up, Auerbach said, it also might entice others to go underground and wait for another amnesty.

On the campaign trail, Ueberroth cites the hypothetical example of an individual who runs an off-the-books car repair shop in his backyard.

An amnesty, Ueberroth says, would bring that business into the tax system.

But Ross said it would also subject the illicit repair shop to workers’ compensation insurance premiums and other business costs that the shop owner now evades, which could offset whatever attractions a tax amnesty might carry.

“If he goes legal,” she said, “his savings are going to be swamped.”