Oregon’s Tax Gap is $1.5 Billion a Year
Tax cheats cost each Oregon taxpayer $2000 in federal and $905 in state taxes annually.[1.]
How Can This Be?
Oregon’s income tax collections are tied to federal tax collections. A recent IRS study shows the IRS is failing to collect $345 billion that is legally due each year. We assume Oregon’s own tax gap matches the federal tax gap. That means that while we collect about $6 billion a year, we’re not collecting an additional $1.5 billion in Oregon income taxes each year.
At Senate Finance Committee hearings Feb. 15, 2006 IRS Commissioner Everson proposed changes to address the gap. The changes however would go after only one tenth of a penny of each missing dollar.[2] David Cay Johnston, investigative tax reporter for the New York Times, responded: the federal government is “not looking in any serious way at stopping tax cheating.” Will Oregon?
It’s Called the Tax Gap
It’s what is legally due, but not paid to the IRS and the Oregon Department of Revenue. The tax gap arises when taxpayers file but under-report income, overstate deductions or hide income, don’t file at all, or don’t pay the full amount due.
Tax cheats are gambling that they won’t get caught. And maybe they won’t. IRS enforcement efforts shrank by 36% over the last decade. While Congress gave the IRS a small increase in capacity last year, the President’s new budget calls for layoffs.[3] Meanwhile, the Oregon Department of Revenue might have grown to take up the difference, but hasn’t.
Former IRS Commissioner Mark Everson says that for each dollar the IRS invests in enforcement, it gets a four dollar direct return. That is an enormous 400% direct return on investment. But a crackdown on tax cheating has effects far beyond those caught. It results in indirect return as well.[2]
Oregon will collect $5.9 billion in state income tax this year, but will leave $1.5 billion uncollected. That is the Oregon tax gap.[4]
Shouldn’t Oregon Invest for a 400+% Return on Investment?
It doesn’t matter who catches the tax cheats. Once caught, they need to pay both federal and state taxes. If the IRS can’t be serious about stopping tax cheating, then Oregon must.
Some states are aggressively taking matters into their own hands. California spent $1 million and collected $700 million in recent enforcement efforts to stop use of abusive tax shelters by wealthy taxpayers and corporations.[5] In the last legislative session, the Oregon Senate followed California’s lead and passed SB480 to strike at the tax gap problem. Unfortunately the Oregon Bankers Association had the bill killed in the House.
Oregon must meet its obligation to make sure taxes are enforced fairly. Oregon’s Department of Revenue must be given the direction, staff and tools needed to collect what is legally due. Honest taxpayers shouldn’t have to pay the tax bill for cheaters.
(data from General Accounting Office report GAO-06-453T)
