NYC TAX | DOES "Amnesty" Work?

Feb. 27, 2009–The Daily News has been running a series of stories showing more than $2 billion in various fines and taxes owed to the City of New York by scofflaws. Their reporter Erin Einhorn today writes that the City Comptroller has sent a letter to the Mayor calling for a tax amnesty.

A tax amnesty works like this: The tax collection agency announces a window of opportunity during which taxpayers owing money from prior years may voluntarily pay up. During this window, the taxpayers are assured they won't have to pay penalties or interest.

Amnesties have worked in the past. People whose consciences were bothering them, or were afraid of being caught some day, chose the amnesty window to come clean. In 1985 a New Yorker sent in a check for $2.5 million to cover unpaid taxes. NY City collected $84 million from an FY 2004 amnesty; NY State collected $22 million from an amnesty the year before.

Mayoral spokesman Marc LaVogna advises that the Finance Department already has an amnesty program, but I could find no details on the www.NYC.gov/finance site or using Google.

Is a tax amnesty a good idea? I had to look into this while I was working for the NY City Comptroller  as chief economist in 1992-2006. Here's what I think:

1. Evidence from NYC's experience with payments for trips and falls suggests it's always a good idea to settle early and reasonably to avoid costly administrative expenses. So Speaker Quinn's idea of negotiating away some fines in return for early payment makes sense. But this is a case-by-case concept rather than a blanket amnesty.

2. Specifically, scofflaws outed in the Daily News should not be covered by a blanket amnesty. The jig is up for them. Delinquents already in the crosshairs of the Finance Department should perhaps qualify for individual concessions to speed up payment but not for a general one.

3. Amnesties offered frequently yield decreasing returns. Having had one in 2004, it may be too soon for the City to have another one. The City's current need for revenue, its potential increase in revenue and reduction in staff time, should be weighed against the loss of penalties and interest.

4. Amnesties have been known to be counterproductive, causing a reduction in compliance. Offers of amnesty should always be accompanied by an announced commitment to a higher level of enforcement after the amnesty window closes. Otherwise frequent amnesties create the danger of "moral hazard", perversely increasing the number of scofflaws. Fewer taxpayers might pay on time if they can count on there being frequent amnesties from penalties and interest.