The governor is ignoring some $64.5 million, state revenue that's "left on the table," as Senate Minority Leader Kate Kelly put it. These are funds that are already owed to the state government. How could that much money--roughly four times the amount that's being cut from Public Schools for fiscal year 2011--remain untapped? Enter the Idaho tax gap.
The Idaho State Tax Commission collects the money that we pay in taxes. The department collected a large portion of the net $2.3 billion of revenue that Idaho will receive in the current budget year.
But not all of the money owed is collected. The tax gap is the amount of money unpaid to the State of Idaho through underreporting, understating income or overstating deductions, underpayment or not filing or paying on time. Most Idaho citizens pay their taxes and most do so on time. Some make honest mistakes. And some flat out don't file or don't pay.
David Langhorst, an Idaho tax commissioner since July 2009 and former Democratic legislator from Boise, spoke to BW about the commission's 2009 Tax Gap Study [pdf].
"It's a self-assessment, a way for us to gauge the possibilities. Revenue departments are always considering what's left on the table," Langhorst said.
According to the report--which the commission's four members, two Democrats and two Republicans, agreed upon unanimously--Idaho's net tax gap is $255 million in negligent tax dollars. Currently, the commission's staff of auditors, collection agents and compliance workers manages to collect only a portion of this money each year.
Langhorst, citing the report, also refers to Idaho's 2003 budget. At the time, declining revenues and budget holdbacks were also an issue. Then-Gov. Dirk Kempthorne signed legislation that gave the Tax Commission an extra $926,000 for collections. According to the report, this funding allowed the department to bring in an additional $10 million in revenue in one year, producing an average return on investment of 13 to 1.
The tax gap report also details what Gov. C.L. "Butch" Otter's cuts to the agency have done to their staffing, and subsequently, their ability to collect. With 24 vacancies left unfilled, the agency determines that its been unable to collect roughly $14.8 million dollars. For example, the agency's four missing "Phone Power" collection agents collect, on average, $2 million per year. Each.
It's estimated that each million-dollar loss to the commission results in $10 million less to the state's General Fund. The Tax Commission's budget has failed to keep in step with population growth, and its budget reflects an attempt to use 2006 dollars to net 2010 profits.
According to the Tax Commission's annual performance report, it costs, on average, only $40 for each closed collection case, and only $418 per audit case closed. For comparison, in FY 2009, audits collected approximately $44 million, and collections netted roughly $120 million.
The Tax Commission used several sources to determine Idaho's tax gap, including information from the Internal Revenue Service, from the Idaho Office of Performance Evaluation and from Tax Commission staff. They used these numbers to generate an estimated Idaho tax gap. The commission then built a business plan called Compliance Initiative 2011 to determine how much of the roughly $255 million can feasibly be collected. Langhorst described the law of diminishing marginal utility, which outlines how, at some point, even unlimited resources would not net the entire amount. Rather, they concluded that the collectible tax gap measures $64.5 million.
The Tax Commission's study concluded that it could produce another large return on investment, as in 2003, predicting a 6-to-1 ratio. By that figure, it would take roughly $10 million to generate the extra needed revenue to shrink the tax gap.
Some think that number might be a bit too safe. According to Sen. Tim Corder, a, Mountain Home Republican: "I think David [Langhorst]'s right, but we know there's more ... I think the commission's being conservative in that estimate. There's support from me on this, sure."
Mark Warbis, Otter's communications director, said Otter put $1.5 million in his budget for additional collections.
"He's funded $1.5 million to 'prove up' to the 6-to-1 return that they've said that they can meet. We're working with [Commission Chairman Royce] Chigbrow as it proves up. The problem is cash flow; you can't spend money you just don't have," Warbis said. "If taxes are due, they should be collected and they should be paid."
That "extra" $1.5 million is built into the already reduced budget when compared to pre-recession funding. Overall, the commission's proposed budget is still down, like most other state agencies.
Speaking of leaving cash on the table, compare the potential uncollected tax revenue to the $82.8 million that Otter's fiscal wizard Mike Ferguson predicts will be available in 2011 but that Otter left out of his budget, just in case. That's $147.3 million on the table.
That's more than all the tables in the newly renovated statehouse combined, plus the marble and tile and everything else.