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Granting tax amnesty could pay dividends for Indiana: State estimates it could collect $100 million or more

March 14, 2005

Indiana scofflaws delinquent on their back taxes could come clean without the threat of penalties under a tax amnesty program that could generate an estimated $100 million or more for the cash-strapped state.

The option of giving lawbreakers a grace period to pay their debts and have interest, penalties and fees waived has been easier for legislators to swallow given Indiana still is confronting a deficit in the $800 million range.

Sen. Luke Kenley, R-Noblesville, chairman of the Tax and Fiscal Policy Committee, thinks the legislation will proceed to Gov. Mitch Daniels' desk soon.

"We could certainly use the cash," said Kenley, the bill's sponsor. "If this is the carrot that gets them in the door, maybe it's worth doing."

If passed, Indiana would join at least 40 other states that have offered similar amnesty programs. In neighboring Illinois, a six-week reprieve netted $532 million, or 2.4 percent of its 2003 tax revenue.

Based on collection amounts of other states, the Legislative Services Agency estimates Indiana could yield as little as $20 million to as much as $268 million of its total collectible tax liability of roughly $271 million. Using the average collection rate of the states, however, LSA projects the amount should be near $103 million. Indiana's tax revenue totaled $11.2 billion in 2003.

The tax amnesty period would run eight weeks and end before July 1, 2006. Delinquents who fail to take advantage of the program would face double the penalties.

The program's success will hinge heavily on an advertising campaign the state will need to mount to spread the word about the amnesty period, Kenley said. In Kentucky, for instance, officials earmarked $1 million to cover promotional expenses and sent pre-filled amnesty forms to taxpayers with liabilities.

The effort is part of the governor's legislative package that House Democrats largely derailed when they staged a daylong boycott March 1 that killed more than 130 bills.

"Tax amnesty was in the convoy before the bomb went off," said Daniels, referring to the boycott. "There's reason to think we can recapture a significant amount of money."

A similar version of the bill authored by Rep. P. Eric Turner, R-Gas City, passed the House and was approved by the Senate 40-8. The bill returned to the House, which can agree to the changes or barter the differences in a conference committee.

While the bill has cleared major hurdles, it's far from a sure bet, said Ed Feigenbaum, publisher of Indiana Legislative Insight.

"What happens in a situation like this is that lawmakers look for a popular vehicle and look to attach their legislation to that so they have a better chance to get their concept through," he said. "... You bog [the process] down with all types of packages."

House Minority Leader B. Pat Bauer, DSouth Bend, has referred to the taxamnesty legislation as a "cheater's-rights bill." Rosanne Ammirati, a tax partner at local accounting firm Katz Sapper & Miller LLP, agreed the bill is unfair to those who have come forward and are incurring interest and penalties. But, given the state's fiscal condition, the program should provide some relief, she said.

"For those in good faith who didn't think they had a tax liability or who weren't prepared to come forward to pay their taxes, this obviously gives them a fresh start," Ammirati said. "From a fairness standpoint, I'm not sure amnesty is a way you want to go."

A few states have offered amnesty programs more than once, which Ammirati said undermines the collection system. Arizona, Colorado, Massachusetts and New York were among the states that permitted debtors to pay in installments. Indiana's proposal would allow taxpayers who owe more than $50,000 to enter into a payment program.

Jim Hamilton, a partner at Indianapolisbased law firm Bose McKinney & Evans LLP whose practice includes tax issues, favors the legislation. He said the benefits far outweigh the negative aspects of the bill.

"There's very little downside to the state of Indiana in doing something like this," Hamilton said. "It's worked so well for other states."

The state's attempts to collect unpaid taxes have yet to produce much results. Legislation enacted during the 2004 session required the Department of Revenue to publish the names of delinquent taxpayers who are known to have outstanding tax liabilities. The warrants published on its Web site are between 2 and 10 years old and target debts of more than $1,000. The program so far has generated $3.4 million.

As Feigenbaum said, the estimate that the state could collect more than $100 million is not "chump change."
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