NCPA - National Center for Policy Analysis

Fewer Tax Collectors, Lower State Tax Collections

April 12, 2002

Despite a sharp drop in revenue that is forcing cuts in spending, state governments are reducing enforcement of their tax laws. As a result, billions of dollars in taxes are going unpaid.

  • In South Carolina, cuts of more than 200 of the more than 500 jobs at the state tax agency have cost the state millions of dollars more in lost revenue than is being saved in salaries for auditors and tax collectors.
  • In Iowa, Minnesota, Nebraska, Wisconsin and other states, auditors and tax collectors have been pulled off the hunt for tax cheats to do clerical work because of budget cuts.
  • Cuts in enforcement of the tax laws primarily benefit cheats with higher incomes, especially investors in partnerships, because until recently partnership income had never been matched to each individual tax return.
  • Last fall the Internal Revenue Service gave states detailed computer files on so-called K-1 income, which could be compared to state tax returns -- but states don't have the manpower to pursue those who fail to report the income.

Three-quarters of K-1 income (named for the tax form on which it is reported) flows to people who report a total income of $200,000 or more -- the richest 2 percent of Americans. According to one expert, former IRS official Jerry Curnutt, New York state alone could collect $2 billion in taxes for the years 1996 through 2000 just by pursuing the top 10 percent of K-1 tax cheats. Twelve other states could collect $1.5 billion, he said.

Source: David Cay Johnston, "Cuts in Tax Enforcement Cost the States Billions," New York Times, April 12, 2002


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