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States continue to offer amnesty programs, but do they work?

Arizona

Arizona’s budget reconciliation bill for 2015-16 includes an amnesty provision whereby the Arizona Department of Revenue (ADOR) will accept applications from Sept. 1, 2015 through Oct. 31, 2015. If accepted, the ADOR “shall abate any unpaid tax liability as of Aug. 1, 2015 that has been established as of Aug. 1, 2015 and that is remaining unpaid as of the date of the amnesty application.” Expected revenues resulting from the program are not yet available.

Massachusetts

In February, we described the details of Massachusetts’ tax amnesty bill, HB 52, an emergency law “which is immediately needed for important public purposes,” including to address the fiscal year 2015 budget shortfall.

This week the governor signed the bill, and the Massachusetts Department of Revenue (MDOR) announced that the program, which applies to certain tax liabilities billed on, or before, Jan. 1, 2015, will run from March 16 through May 15. The MDOR will waive all assessed, unpaid penalties for taxpayers who respond by making a full payment on all outstanding taxes and interest for any period listed on the notice by the May 15 deadline. It estimates that 24,000 taxpayers would begin receiving tax amnesty notices this week alerting them that they qualify for the amnesty.

To assist taxpayers the MDOR provides a Frequently-Asked-Questions webpage, and a technical information release, among other publications, on its website.

Missouri

Missouri announced its own amnesty program, set forth in HB 384. It offers “amnesty from the assessment or payment of all penalties, additions to tax, and interest or delinquencies of unpaid tax…which occurred on or prior to Dec. 31, 2014.” According to Belleville News-Democrat, lawmakers anticipate that the effort will generate $20 million in additional revenue for the state budget.

Likewise, Indiana, New Hampshire, and Louisiana are offering their own versions of amnesty plans, as recently reported by Bloomberg/BNA.

Indiana

In Indiana, HB 1349 authorizes an amnesty program for taxes due and payable for a tax period ending before Jan. 1, 2013. It would last not more than eight weeks and end before Jan. 1, 2017. The plan would excuse applicable interest, penalties, collection fees, and costs on liabilities paid either voluntarily or under an Indiana Department of Revenue (INDOR) approved payment plan. In addition, the INDOR would refrain from seeking civil or criminal prosecution and from assessing the taxpayer.

On the other hand, a taxpayer who fails to pay the tax liability eligible for payment under the program would be subject to double the penalties, except for those who:

  1. Timely file an original tax appeal in the tax court;
  2. Have a legitimate hold on making the payment;
  3. Prove to the Commissioner that notice of the outstanding tax liability was never received; or
  4. Have established a payment plan with DOR.

Upon entering into an amnesty agreement, the taxpayer would then be ineligible for any additional amnesty related to the same tax liability.

The estimated impact of the program is between $109 million and $159 million in fiscal year 2017. A similar program in 2006 yielded $244 million in revenue.

New Hampshire

In New Hampshire, Senate Bill 220-FN-A applies to penalties and interest “in excess of 50 percent of the applicable interest rate for the tax period with respect to unpaid taxes reported and paid in full from May 1, 2015 through July 15, 2015.” The bill appropriates $50,000 for outreach and administrative expenses to implement the program. The two previous amnesty programs have brought in $13.5 million and $14.9 million.

Louisiana

Bloomberg reported that Louisiana’s Tax Delinquency Act of 2014 implements the third amnesty program in as many years, which will take place during a one-month period some time in 2015. Bloomberg cautions that “[t]axpayers waiting until 2015 to come forward, however, will not receive as generous a deal as taxpayers did in the prior years. Only 33 percent of penalties and 17 percent of interest will be waived, compared with 100 percent of penalties and 50 percent of interest in 2013 and 2014.”

The Louisiana Department of Revenue (LDOR) reported that the one-month amnesty program that ended on Nov. 14, 2014 generated more than 41,000 applications and delivered more than $169 million. It gave eligible taxpayers the chance to bring their accounts up-to-date by paying all taxes due, with a waiver of all penalties and 50 percent of the interest.

Do amnesty programs work?

The Bloomberg article sought to answer the question, "do amnesty programs work?" noting that since 1982, 46 states, plus the District of Columbia and New York City, have offered 121 amnesty periods. One of the states was New Jersey, which collected about $75 million in back taxes during the late November and December 2014 amnesty period.

Bloomberg compared the amnesty revenue of Massachusetts and New Jersey, highlighting the fact that Massachusetts only brought in $57 million, compared to New Jersey’s $75 million.

Considering Louisiana’s $169 million, New Hampshire’s $13.5 million, Indiana’s estimated $109 million to $159 million, and Missouri’s estimated $20 million, the data show that results can vary widely amongst the states.

Measuring these actual or estimated amnesty collections against these states’ 2013 rankings in tax collections per capita and state debt per capita, as reported by the Tax Foundation, yields an interesting perspective:

 

State 

 Actual or estimated amnesty collections 

 2013 rank in tax collections per capita 

 2013 rank in state debt per capita 

Indiana 

$109 to $159 million 

25 

24 

Louisiana 

$169 million 

41

17

Massachusetts 

$57 million 

10 

Missouri 

$20 million 

45 

27 

New Hampshire 

$13.5 million 

50 

New Jersey 

$75 million 

12 

These comparisons lead one to wonder whether amnesty programs are effective. Law360.com concluded that the “glitter is not always gold.” Despite the fact that states need the revenue, “overuse of amnesty programs may create a psychological effect among taxpayers that ultimately drains state coffers.” If they are offered in quick succession, they can contribute to tax delinquency. “There are behavioral and psychological effects of amnesty bills that many states don't take into account…taxpayers may think they'll get a free pass until the next program comes along.”

States can take steps to mitigate tax delinquency, like having gaps between amnesty periods and robustly enforcing tax laws. But robust enforcement creates political problems for lawmakers; “no legislator is going to be thrilled with the Internal Revenue Service or Department of Revenue vigorously pursuing taxpayers.”

Law360.com cites California’s "carrot and stick" approach as a good one. There, taxpayers benefit from reduced interest and penalties, but if they do not come forward by the end of the amnesty period and California’s Department of Revenue finds them later, they are subject to “sometimes crushing penalties.” California ranks number 11 and 18 on the Tax Foundation’s 2013 rankings in tax collections per capita and debt per capita, respectively.

In the end, a well-run tax amnesty program is usually a net benefit for states, even if some experts argue that the voluntary compliance programs already in place make amnesty programs unnecessary.

States consider taxes on sugary sodas and candy

According to BridgingTheGap, as of Jan. 1, 2014, there were 34 states, plus the District of Columbia, that already tax sugar sweetened soda sold through stores, and 39 states plus the District of Columbia that tax the same when sold through vending machines.

In last November’s midterms, voters in Berkley, California decided that a tax on sodas and other sugary drinks (like sports and energy drinks, juices with added sugar, and syrups that go into sugary drinks at cafes) was a good idea and approved Measure D. In contrast, voters in San Francisco did not approve a comparable measure.

Now, several additional states are considering their own laws to combat the parade of "horribles" that results from too much sugar consumption, like obesity, diabetes, and spiking healthcare costs.

Connecticut

Last month, in an effort to cut childhood obesity, type 2 diabetes, hypertension, and other health problems, Rep. Candelaria of the 95th District proposed HB 5461. The bill would impose a tax of one cent per ounce on carbonated and non-carbonated soft drinks, and candies that are “high in sugar.” The proceeds would be used for three things:

  1. To address childhood obesity through prevention efforts;
  2. To fund municipalities throughout the state; and
  3. To contribute to the Governor's Scholarship program.

The ctpost.com noted that Connecticut would be the first state to tax not just soda, but candy as well. The article also explained that the tax would fall on manufacturers and wholesalers, so would be “hidden from the consumer in store prices.”

As can be expected, health advocates support HB 5461. The ctpost.com quoted Roberta R. Friedman, director of public policy at the Rudd Center for Food Policy and Obesity, who revealed that there is a “26 percent increase risk for type 2 diabetes from drinking two servings of sugar-sweetened beverages a day, compared to drinking one serving per month.” The Rudd Center’s research shows that a 10 percent increase in price may yield an eight to 10 percent reduction in consumption.

Also predictably, industry opposes the “nanny state legislation.” Stan Sorkin, president of the Connecticut Food Association, which represents grocers and supermarkets, said the tax proposal is unacceptable: “With 20,000 new products introduced to the market each year, who is going to figure out what is candy? Who will be responsible for managing the database? Where will the tax be collected? What's next on the list of items to be taxed based on the agendas of interest groups?"

Sorkin also worries that the tax will result in the loss of sales to out-of-state stores, and a black market in soda sales.

Illinois

Illinois’ SB 1584, named Healthy Eating Active Living (HEAL), takes a similar approach to reducing sugar consumption. HEAL becomes effective July 1, 2015, and contains these two main provisions:

  • A one cent per ounce tax on distributors of bottled sugar-sweetened beverages, syrups, or powders on bottled sugar-sweetened beverages sold or offered for sale to a retailer for sale in Illinois to a consumer;
  • A requirement that such distributors obtain permits from the state.

98 percent of the proceeds would be deposited into the Illinois Wellness Fund to be used for wellness programs and for expanded obesity prevention and treatment services for Medicaid beneficiaries. The remaining two percent would be deposited into the Tax Compliance and Administration Fund for the administrative costs of the Department of Revenue.

The Illinois Licensed Beverage Association, which opposes the tax on the grounds that people should be able to make their own choices, anticipates that HEAL would generate more than $600 million per year.

Vermont

Vermont’s House Committee on Health Care introduced H24 in January. It imposes a two cents per ounce excise tax on distributors of sugar sweetened beverages, syrup, and powder sold in the state. H24 defines “powder” as any “ solid mixture of ingredients used in making, mixing, or compounding sugar-sweetened beverages by mixing the powder with any one or more other ingredients, including water, ice, syrup, simple syrup, syrup, fruits, vegetables, fruit juice, vegetable juice, or carbonation or other gas.”

A WCAX-TV piece highlighted both sides’ arguments: Proponents assert that the revenue would “cut into the state's rising healthcare costs by discouraging consumption.” Opponents insist that “a new tax would hurt the wallets of businesses and Vermonters struggling to make ends-meet.”

Governors announce their budget proposals

Pennsylvania

In late February, Pennsylvania Governor Tom Wolf announced his 2015-16 budget, which includes slashing the corporate income tax rate. Declaring that “Pennsylvania's economic prosperity has long been hobbled by an outdated tax structure that fails to incentivize job growth,” Gov. Wolf claimed that his plan will create a competitive climate to attract and retain jobs and businesses. His plan includes the following provisions:

  • Reducing the corporate net income tax by half within two years flipping Pennsylvania's ranking from second highest rate (9.99 percent) to the fourth lowest (4.99 percent);
  • Eliminating the capital stock and franchise tax; and
  • Closing loopholes through combined reporting to level the playing field for all Pennsylvania business.

In building on the Pennsylvania tradition in manufacturing, Gov. Wolf seeks to create new, good-paying jobs by establishing a Made In Pennsylvania Job Creation Program through a $5 million tax credit to be distributed to manufacturing companies that are creating good paying, middle class jobs; and providing $5 million to the state's Industrial Resource Centers to leverage the talents of our research universities to advance manufacturing technology and commercialization.

Philly.com reported that the corporate net income tax rate reduction would occur in phases:

  • In 2016, it would drop to 5.99 percent;
  • In 2017, to 5.49 percent;
  • In 2018, to 4.99 percent.

In addition to these provisions, PennLive.com highlighted other important changes called for in Gov. Wolf’s proposal:

  1. A 20 percent increase in personal income tax rate, from 3.07 to 3.7 percent;
  2. This personal income tax increase would fund, in part, a $3.8 billion reduction in school property taxes. Gov. Wolf estimated that this could materialize as a 50 percent average reduction for homeowners, with a particular emphasis on high-tax and high-poverty districts;
  3. A 39 percent increase to the minimum wage, from $7.25 to $10.10 by 2016;
  4. A $1 billion cash infusion into all kinds schools, including charters, public, community colleges and universities;
  5. A $3 billion pension refinancing funded through projected profit increases from modernization measures, like expanded state liquor store hours and direct sales to consumers.

The proposal also includes an increase to the sales tax and expanding it to include 45 new items currently exempt, like non-prescription drugs, cable television, funeral services, spectator sports, and legal services, and a $1 per pack cigarette tax increase, reported TribLive.com.

Finally, NPR's StateImpact noted that the proposed five percent natural gas extraction tax, plus 4.7 cents per thousand cubic feet, is projected to bring in over $1 billion per year, which Gov. Wolf wants to use to boost funding to public education.

North Carolina

In early march, Gov. McCrory presented his recommendations for North Carolina’s 2015-17 biennial budget. On the grounds of fiscal discipline, Gov. McCrory promised no new taxes, a Triple A bond rating from all three major ratings agencies, a budget that grows more slowly than inflation, and a balanced budget, as required by the state constitution.

Under the headline "McCrory Makes Tough Choices’ in 2015-17 Budget Proposal Released on Thursday," HCPress.com analyzed the budget’s key focus areas, which include job creation, education, and infrastructure.

In the job creation area, the governor supports legislation, separate from the budget that allocates $45 million for NC Competes and $20 million for the Site Infrastructure Development Fund, designed to attract major manufacturing projects, such as an auto production plant. In addition, he would like to see $15 million investments each year for early stage commercial ventures, $2.5 million in recurring investment for the recruitment and development of entrepreneurial talent, and $10 million in each year of the biennium to encourage the production of long-term, sustainable film projects, among other things.

In the education area, the budget increases spending on K-12 funding by 2.8 percent, or $235 million. The budget also allocates $111.4 million in each year of the biennium to increase teacher base pay to $35,000 a year, $15 million in the biennium to reward high performing teachers, $70 million for new textbooks and other instructional materials, and an expansion of the pre-K program to accommodate 26,800 at-risk four-year-olds.

In the infrastructure area, the budget commits nearly $4.8 billion for Gov. McCrory’s 25-year transportation vision, which includes:

  1. An increase of $135 million for critical infrastructure investments;
  2. $51 million for road preservation and improvements;
  3. $36 million for capital repairs and renovations under the Capital Improvements plan; and
  4. $10 million to ease congestion in rural and small urban areas.

The governor said he would request a transportation bond of $1.2 to $1.4 billion for quicker construction of projects in the 25-year vision plan, along with a $1.2 to $1.4 billion general obligation bond to revitalize blighted state buildings or build new facilities for various agencies, like the National Guard and community colleges that will help create economic opportunities.

Not everyone is pleased with Gov. McCory’s ideas. Quoting Will Rogers when he said, “If you find yourself in a hole, stop digging,” the North Carolina Policy Watch contends that Gov. McCrory and the state’s lawmakers need to make “smarter budget and tax policies.” Referring to wages that have slipped further behind the national average and are not keeping up with inflation, and the promised “huge boon to the economy” that never happened, the group advised officials to stop digging and start climbing.

For additional information regarding these subjects, or any other multistate tax issues, please contact:

David M. Kall
216.348.5812
dkall@mcdonaldhopkins.com

David H. Godenswager, II
216.348.5444
dgodenswager@mcdonaldhopkins.com

Susan Millradt McGlone
216.430.2022
smcglone@mcdonaldhopkins.com

Multistate Tax Services

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.

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