New Jersey made headlines today after the state collected as much as $600 million from a tax amnesty. It looks like great news: the state is collecting extra money during a recession, and late tax filers are able to pay back the money they owe without getting bitten by high interest and fees.
The problem is the behavior this engenders. A quick look at their previous tax amnesties reveals the effect this kind of program has on New Jersey taxpayers:
- During the first amnesty, in 1987, the state expected $50 million in back taxes. These taxes covered taxes for all prior years.
- In 1996, another amnesty planned on collecting $80 million in back taxes for the previous nine years, and got $90 million instead.
- In 2002, a tax amnesty plan raised far less than the $150 million expected for the previous eight years.
- And now, the plan is collecting about $600 million, possibly more, from the previous seven years.
In short: every tax amnesty covers less time and expects more back taxes. Why? Because every time New Jersey does a tax amnesty, every taxpayer factors that into their decision to pay taxes. We’ve gone from expecting $9 million a year in accumulated back taxes (the $80 million projected haul from the 1996 amnesty) to expecting almost $30 million a year in back taxes ($200 million divided by the seven years since the 2002 amnesty) — and it looks like we’re actually seeing about $90 million per year in repaid taxes.
In theory, a tax amnesty is a fine idea. And it certainly does bring in the revenue. But every amnesty plan trains taxpayers to take fines and interest less seriously. Over time, it leads to exactly what is happening in New Jersey: newer, bigger amnesties, at a faster and faster pace.