Anatomy of a Tax Amnesty
Tax amnesties are unpopular with the public. On the other hand, they raise much-needed money in this cash-strapped climate.
Tax amnesties are an iffy proposition. They smack of moral hazard, forgiving those who cheat while the rest of us obey the law. In the public's eye, failing to pay taxes outranks a slew of other sins. According to polling analyst Karlyn Bowman's Public Opinion and Taxes: 1937 to Today, 79 percent of Americans surveyed considered not reporting income on a tax return to be "morally wrong," while fewer adjudged other sins such as excessive drinking, smoking marijuana and sex between unmarried adults to be reprehensible behavior.
On the other hand, amnesties raise money already due the state. That extra bit of uncollected cash can be significant in these budget-stressed times -- at least that was the logic Washington state legislators were following when they asked the state's Department of Revenue (DOR) to see how much it could raise with an amnesty on business taxes. The Legislature originally hoped for $28 million to help alleviate budget cuts, but the DOR pulled in more than ten times that amount.
So I asked the DOR's Director Suzan DelBene, how did the department prepare for and execute the amnesty, and what lessons did they learn from it? An edited transcript follows:
What were your original goals?
We needed to raise revenue for this fiscal year but we also wanted to help our small business community get back on track. It was our first amnesty and it drew participation from nearly 11,000 businesses. Here in Washington we classify a small business as one with $1 million or less in gross annual receipts. By that definition, 78 percent of the folks who participated in the amnesty were small businesses.
How much did you raise?
We came up with big numbers: $343 million (part of that was state dollars and part sales tax dollars for local governments). Businesses have to pay sales taxes as part of their business activity. The program was a combination of sales and other businesses taxes. It's a significant tax base for state and local governments.
Why do you think so many businesses came forward?
The amnesty program lowered barriers. It made it even more risk free for businesses who had not registered with the state to register or who had accounts closed but had business going on to reopen accounts. During the amnesty, we had 476 businesses open new accounts or reopen previously closed accounts. That's three times what we would get in a normal year. The nice thing is, now that they are on track, we can keep track of them going forward and keep them on a compliance schedule.
We did a lot of public outreach through public radio and information on our website so people were very aware that there was an amnesty and how to participate.
How did you prepare to run an amnesty program?
We had a core committee that worked on it that had representatives from all divisions. All the right players met weekly. We had a distribution list to spread information out to everyone who needed it. The program impacted everything we did, so communication was critical. We could have made many mistakes if folks were not talking to each other.
From the core group, we compiled all the different ways the agency's divisions would be impacted. We created procedures and forms, and put it in a single spot on the Internet so everyone could access it -- internal staff as well as taxpayers participating in the program. We also used an Intranet. We developed a Q & A for the staff. It had well over 100 questions on it: How are we going to handle XYZ? What would we do in this sort of case?
What lessons did you learn that would be relevant to other states developing an amnesty program?
Don't have the end date be a Saturday. We took the end of April, which turned out to be a Saturday and that made it less clear for folks when payments should get in.
We had a three-month program. A shorter period would make sense. There's not a lot of activity until the end of the period. We hardly saw any activity the first month but the third was packed. Two months would be a good number.
Pick the right time of year. We didn't have a lot of options. This was about making some impact this fiscal year. But February throught April was harder on businesses since April is normally a big filing cycle. If you have the opportunity, find a quiet period.
Leave extra time at the end for review. This one caught us off guard. Applications were due by April 18 and the program ended April 30, but so many came in at the end we needed more time to review and approve. A few were approved after the deadline because we got backlogged. We could have put a deadline for applications earlier and given ourselves a bigger gap of, say, three weeks before the final payment period.
We didn't hire new people for this program. Our staff did double duty. Many states look at outsourcing their amnesty program. Part of our success was that we did it ourselves. People knew who to talk to and whom to call. That's difficult to do if a third party is doing this.
Do a lot of usability testing when creating new forms. When we started designing forms for this program, we looked at what other state agencies had done. We took the paper form to an internal forum and asked: What do you think of this for our customers? We asked some of our taxpayers as well. Will people be able to figure out how to fill this out? We got a resounding "no." We redesigned from scratch so the form is easy. If we had gone with our original form, it would have caused a massive traffic jam on our phones, with people calling to ask how to fill it out. As the program progressed, we updated the application when we discovered there was some confusion. Electronic forms mean you can tweak it whenever you need to. We made minor changes but they added to the simplicity, clarity and efficiency.
Amnesty is not a well you can go back to whenever you are thirsty. You have to maximize your program when you do it.