If California
taxpayers paid up, state's deficit would disappear
Published:
Saturday, Apr. 7, 2012 - 12:00 am | Page 1A
Last
Modified: Sunday, Apr. 8, 2012 - 12:46 pm
As
Californians put the finishing touches on their income tax returns, tax collectors say the
state's $9.2 billion deficit would drop to zero if all taxpayers submitted what
they owe.
That
means every resident claiming the market value of tattered jackets donated to
charity. Every business reporting every dollar of income they receive even when
paid in cash. Every service worker reporting every tip. And every resident
paying use tax on Internet purchases.
But
full compliance does not occur.
In a
new estimate, the Franchise Tax
Board says that $10 billion in state income taxes go
unpaid each year, often when workers receive payments under the table,
businesses skirt reporting requirements or people take deductions for which
they do not qualify. The state Board
of Equalization says an additional $2.3 billion in sales and use taxes go
unpaid.
"It's
our way of investing in society for the various benefits we receive," said
Jerome Horton, who helps oversee the state's two major tax agencies as chairman
of the Board of
Equalization and board member at the Franchise Tax Board.
"When we find folks aren't, it places an unfair burden on everyone else
playing by the rules."
Dennis
J. Ventry, a tax law professor at the UC Davis School of Law, said that as much
as tax agencies like to call the system voluntary because people file their own
returns, he doesn't consider it so.
According
to a 2005 Legislative Analyst's Office report, taxpayers report about 99
percent of their wage income as employers withhold taxes and document income on
W-2 forms. But when people self-report their income streams, compliance dips
below 70 percent.
"If
you ask me what keeps people in compliance, it is the withholding regime and
the reporting regime," Ventry said.
The
state's $10 billion income tax gap and $2.3 billion sales and use tax gap total
13 percent of the state's 2010-11 general fund budget, the year for which they
were estimated.
The Franchise Tax Board, which
oversees income tax collection, does not have precise statistics on the state
gap. The board points to a recent Internal Revenue Service study upon which the
state's findings are based.
The
federal study of the 2006 tax year found the IRS received 83.1 percent of taxes
through voluntary compliance and 85.5 percent after accounting for people who
paid late or after being audited.
The
bulk of the $450 billion federal tax gap came from underreporting, a broad
category that ranges from hiding income to abusing deductions to not paying
self-employment tax. The rest of the gap: people who didn't file at all or paid
less than they owed.
Estimates
of the tax gap come largely from studying audit data on compliance and applying
statistical techniques to determine how much businesses and individuals fail to
pay their full share.
Horton
believes the gap is significantly larger, because the estimates do not consider
income from illegal activities such as selling drugs or counterfeit goods.
To
Ventry's point, the analyst's report suggests that the less "visible"
a payment is, the less people comply.
"This
is clearly the case in cash transactions, as well as in other areas where there
is a lack of adequate independent reporting requirements," the report
notes. "For example, when businesses do not accurately report payments to
subcontractors, tax agencies have no way in which to verify the income."
The
state tax board routinely reports on cases in which Californians are caught
cheating on their taxes. In 2008, a couple who ran two El Dorado County
painting companies failed to report more than $547,000 in taxable income. The
couple faced jail time,
community service and
probation in addition to having to pay back taxes and penalties.
A
Brentwood couple who owned seven sandwich shops and a newspaper distribution
business last year pleaded no contest to tax evasion. They did not
file tax returns for four years
and hid more than $800,000 in income, partly by opening a bank account with false Social
Security numbers.
The tax
board has the advantage of piggybacking on IRS efforts to find income tax
cheats. But the state is also trying to conduct more of its own data-sifting to
detect where California taxpayers are not reporting income.
One
instance is a pilot program started in 2008 that flags people who register
vehicles worth at least $25,000 with the Department of
Motor Vehicles but fail to pay income taxes. The DMV
forwards car registration data to the board, which then cross-checks the list
against its own records.
Some of
those flagged never filed tax returns,
while others owe back taxes. Since 2008, the state has collected nearly $37.9
million through the enforcement program.
"It's
an indicator that someone is in the state and may have the means through some
other sources to pay their tax debt,"
said FTB spokeswoman Denise Azimi.
Horton
is pushing Senate Bill 1185 with Sen. Curren Price, D-Los Angeles, to create a
"Centralized Intelligence Partnership" that would coordinate data
across state agencies to flag tax evaders and people selling illegal goods and
services. It would incorporate data from agencies ranging from the DMV to the Department of
Consumer Affairs.
To
increase tax compliance and reduce deficits, lawmakers have offered proposals
in the past that would have required businesses to withhold taxes on payments
to independent contractors. None passed.
In 2009, former Gov. Arnold Schwarzenegger vetoed a budget plan that would have
raised an estimated $300 million annually. Business groups said it would have
been too burdensome.
"Businesses
would have had to spend time, labor and a lot of money to implement withholding
systems and comply with some very complex tax laws," said David
Kline of the California Taxpayers Association. "Other companies operating
out of the state would not have faced the same costs, so it would have been one
more example of making it difficult to do business for a California company."
For years,
Democrats have tried to force Amazon and other online retailers to collect sales tax from California
shoppers. A Board of
Equalization report last year showed that only 0.42 percent of
taxpayers paid use tax on their personal income tax forms, though others may
have paid elsewhere.
In a
deal last year with Amazon, lawmakers agreed to delay a new law requiring
online sales tax collection until September 2012. Amazon is expected to collect
sales tax on California purchases at that time, and the company is believed to
be working on a 1,500-employee distribution center in
western Stanislaus
County.
