Sacramento on Right Track With Amnesties for Tax Cheats
Sacramento
If you’re a big-time tax cheat and got a certain letter from the state Franchise Tax Board last winter, your eyes might have opened wide -- and your checkbook soon afterward.
The board, the letter began, had received thousands of “leads” from the IRS and “other sources” about “abusive tax transactions.”
“These leads,” the letter continued, “identified taxpayers, promoters and tax schemes involved in sheltering income. We have reason to believe that you may have participated in a potentially abusive tax transaction to avoid paying income tax.”
That probably grabbed your attention.
No, this was not an audit notice, although it was signed by the state’s chief auditor. This was a carrot-and-stick notice.
The stick: State penalties for using illegal tax shelters had been substantially increased and the statute of limitations extended from four years to eight. And we know who you are, it was hinted.
The carrot: Act now, before April 15, and you’ll be granted amnesty. Pay only the back taxes you owe, plus interest, and all penalties will be forgiven. It’s a “one-time offer.”
One taxpayer sent in $30 million, according to a staffer familiar with the state operation.
In all, $1.3 billion was collected from roughly 1,000 individuals and corporations. Originally, amnesty advocates had estimated they might pick up $90 million.
It’s one of the most wildly successful state programs in memory -- an incidence of Sacramento thinking smart.
And it was devised, incidentally, pre-Arnold Schwarzenegger -- back when Gray Davis was governor, although the idea came from legislators.
Credit the stick, conceivers of the program contend. It dramatically changed the tax cheaters’ cost-benefit analysis. Before the amnesty, penalties were minor, if the culprits even were caught. Now, fines can be nearly double what’s owed. And new technology helps identify suspects.
Individually, credit Assemblyman Dario Frommer (D-Los Angeles). He was tipped off to the cheating problem and collection potential by a hiking buddy who’s a tax auditor. Frommer introduced a bill. So did Sen. Gil Cedillo (D-Los Angeles), chairman of the Senate tax committee, whose staff wrote a bill with Stanford tax law professor Joseph Bankman. Everybody stole from U.S. Sen. Charles E. Grassley (R-Iowa), whose similar bill is stalled in Congress.
State Controller Steve Westly, who made his fortune as a computer nerd and is chairman of the Franchise Tax Board, worked with the IRS to create a software program that identified suspected shelter cheats. Then 7,500 were mailed the intimidating letter.
Only one Republican lawmaker -- Assemblyman Abel Maldonado of Santa Maria -- voted for the Frommer-Cedillo bills. Republicans preferred a carrot with no stick that had been proposed earlier by Sen. Rico Oller (R-San Andreas). It would have offered amnesties to all taxpayers -- not just rich shelter abusers -- but wouldn’t have toughened penalties.
Law-and-order Republicans demand stiff penalties for most offenses, but not tax cheating!
Now, Gov. Schwarzenegger is thinking about offering amnesty to income and corporate tax scofflaws. That could generate $1.2 billion, says Finance Department spokesman H. D. Palmer.
Assemblywoman Judy Chu (D-Monterey Park), who heads the Assembly Appropriations Committee, already has a carrot-and-stick amnesty bill for income and corporate tax fudgers.
“We’re not looking at the little guy with the Goodwill bag,” she says. “We’re looking at people who are cheating the state out of millions.” Chu is conservatively estimating a net of $550 million.
She and Westly are digging into the underground economy, much of it hidden by hard-to-trace cash transactions. “We’re not going to get every gardener or part-time construction worker,” Westly says. “They’re not the focus. Our focus is the big fish.”
All sizes of fish swim in these murky waters, however.
The tax board, for example, estimates that people in “vehicle sales” pay only 49% of the taxes they owe; “tip earners” pay 50%; and “informal suppliers,” 56%. The latter is a broad IRS category that ranges from auto repairs to flea markets to catering.
Chu also wants to target sales tax cheats -- merchants who collect the tax from customers, but pocket some of it instead of sending the money to the state. She estimates $75 million could be recovered through an amnesty.
So add up all this potential windfall and it comes to $1.3 billion already banked and perhaps another $1.3 billion -- give or take -- to be reaped in future amnesties as the state tries to climb out of a $14-billion deficit cavern.
The challenge for Schwarzenegger will be to avoid paying for ongoing expenses -- like education -- with these jackpot winnings because the revenue can be generated only once. This was the kind of irresponsible spending -- on both permanent programs and tax cuts -- that trapped politicians in the deficit.
Better to spend the one-time revenues on one-time projects -- like the highway construction that has been slowed by budget raids.
Regardless, you’ve got to applaud the logic: Before trying to raise new taxes, collect the old ones that are owed.
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George Skelton writes Monday and Thursday. Reach him at George.skelton@latimes.com.
