Wisconsin Fails to Collect $1.2 Billion in Un-paid Taxes

Wisconsin’s $2.5 billion a year state budget deficit is expected to grow by another 8 percent this year. This despite already deep cuts in government services, a freeze on state employee wages and hiring and furloughs. Candidates for Governor are talking about still deeper cuts in the state workforce and aids to local governments in order to help close the gap.

But, according to a recent study by the Institute for Wisconsin’s Future, we could solve a huge part of that budget shortfall if we just collected $1.2 billion in taxes that are owed to the state each year.

The study, entitled Wisconsin’s Billion-Dollar Tax Gap, looked at five types of taxes. The authors, Dennis Collier and Jack Norman, used Department of Revenue (DOR) data and standard accounting methods to calculate the amount of uncollected taxes owed to the state in 2009.

How to not pay taxes
There are three ways that individuals and corporations manage to under-pay taxes, according to the report: they can underreport income, fail to file tax returns or simply not pay owed taxes in full. The authors note that not all underpayments are deliberate and that the complexity of tax laws contributes to honest errors.

But, most underpayments probably are deliberate. The study found that the largest sources of uncollected taxes were the result of unreported income by businesses and corporations. These include taxes owed on unreported income, failures to report “pass-through” income for limited liability companies and failure to pay sales taxes on all sales. Unreported business income shorts the state treasury by about $191 million a year while underreporting of sales revenue adds another $317 million.Underreporting of workers’ earnings is much less of a problem, according to the report, with only $56 million owed in uncollected taxes on wages. This probably is due to the fact that wages and salaries are strictly reported to the state and taxes are generally withheld during the year. Similarly strict monitoring is not in place to track business income.

Closing the gap
The report acknowledges that the state has taken measures in recent years to become more effective at collecting unpaid taxes. Successful measures include adopting more streamlined reporting techniques and the creation of a “voluntary disclosure program” so that delinquent taxpayers can fulfill their obligations without incurring penalties.

One of the most effective measures for collecting unpaid taxes was an increase last year in the number of tax auditors and revenue agents at the state DOR. Report authors are perhaps too modest to mention it, but the IWF, along with state employee unions, was instrumental in convincing the Legislature to fund more DOR staff to offset planned reductions in the workforce.

Wisconsin’s Billion-Dollar Tax Gap concludes with three recommendations to increase the collection of taxes owed to the state:

Bolster Department of Revenue capacity, by increasing staffing levels and up-grading technology.

Simplify tax laws, and in so doing, simplify income reporting and tax calculations.

Monitor the “tax gap,” to keep the issue before policy-makers and the public and to ensure that adequate resources are devoted to the problem.

Who knew what and when?
According to a June 18 article in the Milwaukee Journal Sentinel, the DOR has known about this “tax gap” at least since completing a draft report in 2007. But the Department refused to release their findings, going so far as to claim it was exempt from the public open records law because it was still a “work in progress.”

Collier, a former DOR employee, worked with Department managers and employees throughout his research on the IWF project, so they knew the material would be public soon. “The reason we did it was that we got fed up waiting for the DOR version to be released,” says Norman. “They knew we were doing it; they still wouldn’t release theirs.”

We can speculate why, even in the face of huge budget deficits, the Administration wouldn’t want to make the fact of $1.2 billion in un-paid taxes a public issue.

One possible explanation is that disclosure of the problem might make the Doyle Administration appear incompetent.

Another possible explanation for stonewalling the DOR report is that it implies the need for additional state tax auditors and agents at a time when both major political parties are committed to reducing the number of state employees.

“I would guess that the driving force against releasing the report is simply the terror on the part of politicians of mentioning the T word (“tax”) in public. Unless you’re on the campaign trail screaming about cutting taxes,” suggests Norman. “Politicians don’t want to be associated with being tough on taxes, even if it means cracking down on tax cheats.”

Cutting our way out
Most observers agree that it is not possible to solve the state’s budget deficit through cuts in employees and services. It will be necessary to increase tax revenue, either through restoring old taxes that have been eliminated in recent years or by expanding who is required to pay income and sales taxes. And, of course, the obvious: by collecting taxes that are owed but not paid.

“Witness those states that are engaged in ruthless cutting—Arizona, California and others—and the damage to social services and public infrastructure is extraordinary,” says Norman. “It will take extra money to try to rebuild the institutions that are being cut.”

“Amounts of money that in more flush times would be considered small change (say, $50 million), are huge because the impact of such cuts in a particular program can be deadly,” he says. “So, even if working on the tax gap would only produce revenues on that order, it still is very significant and should be, in our view, a major priority.”

Wisconsin’s Billion-Dollar Tax Gap is available on-line at www.wisconsinsfuture.org.

This study is part of the Institute for Wisconsin’s Future “Fair and Adequate” series, which they explain “examines how the current tax system works and what changes are needed to create a fair system that adequately funds the services needed for the common good.”

In addition to producing original studies on Wisconsin’s tax system, the IWF also functions as a clearinghouse for related studies conducted elsewhere, many of which are available through links at their website www.wisconsinsfuture.org.

And, of course, if you or your organization would like to help fund our very own Think Tank, contributions would be put to good use.