Egan, Idaho Politics

Big Sky Tax Cheats

montanaMontana Figures It Out

For as long as I can remember Idaho has had a running debate about whether to really invest in a robust program of tax compliance in the interest of finding those individuals and businesses who, through villainy or ignorance, don’t do what the vast majority of us do – pay our taxes.

Historically the Idaho response has been to not make it a public or budgetary priority to go after the tax scofflaws. A modest investment was made in the Idaho compliance effort this year, but what was done also suggests there will be a modest payoff. Montana does it differently.

Gov. Brian Schweitzer made national headlines last week when he announced that tax audits and other compliance efforts in Montana have produced $80 million in new revenue this year – much of it from out-of-state individuals and businesses – that has helped keep the state budget balanced. Schweitzer added, for full political and practical effect, that this is money the state is owed and doesn’t cause Montanans who actually follow the law to pay any more.

In an editorial the Billings Gazette noted that 96% of working Montanans file a tax return annually, but out-of-staters are much less likely to comply with the law. In lauding Schweitzer’s initiative, the newspaper said, “Let’s keep making the tax cheats pay. Get that money for Montana, governor!”

Schweitzer, colorful and quotable as ever, compared the tax collection effort to the guy at the circus gate who makes sure everyone “pays their fair share.”

As noted, Idaho did invest a modest amount of money this year in its enforcement efforts but, according to the Tax Commission’s most recent annual report, audit efforts addressing all state tax categories collected about $44 million in Fiscal Year 2009. Included in that total is almost $11 million collected from those not in compliance with sales tax requirements. Compare that to the $80 million collected in Montana and don’t forget there is no sales tax in Montana. Idaho also has 600,000 more residents than Montana and, presumably, a substantially greater number of taxpayers.

All this suggests that Idaho is leaving a lot of money – money that could be spent on education and other priorities – under some mattress somewhere.

Two points to ponder, one practical and immediate the other practical and longer-term:

  • At a time when Idaho has slashed spending across the board and actually reduced, for the first time ever, year-over-year funding for public education, wouldn’t a tougher approach to tax compliance make sense both as a budgetary necessity and as a simple matter of fairness to the thousands of diligent Idaho taxpayers? For every dollar Montana spends on audits it collects $8 in taxes that legally should be paid. Anyway you slice it, that is a pretty sound – and conservative – return on investment.
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  • Idaho’s revenue department, with due respect to the four full-time and politically appointed commissioners who run the agency, is an inefficient, 1944 approach to collecting the state’s revenue. (The Tax Commission was created by Constitutional amendment in 1944 with part-time commissioners, the full-time commissioners were put in place in 1967.) Idaho needs – and this has been long debated – an appointed director of revenue who, as in Montana and most states, is directly accountable for running the department and collecting taxes. Such a move would save money, could likely provide greater efficiency and, as witnessed by recent allegations of political favoritism, remove “politics” from tax collecting. It is a reform long overdue and, frankly, both major party candidates for governor should embrace such an initiative.

Add to these practical realities the fact that in politics – and tax policy is politics – perception is reality. And the perception is clear – from whistle blowers to an on-going ethics probe of a tax-protesting state legislator – that something is not altogether right with Idaho’s approach to collecting taxes.

Three long-time, former Tax Commission employees recently came forward alleging there is truth in the claim made in a pending lawsuit that certain well-connected Idahoans have benefited from “sweetheart” tax deals engineered at the Tax Commission. It has been suggested that a lawsuit may not be the best way to fix whatever is wrong. Probably true. A top-to-bottom independent review, followed by serious legislative work on reform, makes a lot more sense.

If the state wants to turn over rocks looking for legitimate tax revenue that is not being collected, Montana has the right structure, attitude and road map. Continuing the approach Idaho has taken is a recipe for more budget cuts, continued unfairness to those Idahoans who try hard to play by the rules, and a further deterioration of public confidence in the system.

You don’t have to be a $500 an hour tax lawyer to see that there is an election year issue – and potentially a big scandal – in there somewhere.