In 1982, the state of Illinois took its first stab at what is now the latest panacea for increasing tax revenue: granting amnesty to taxpayers who owe back taxes.
The state revenue department, operating within its regular budget, did little to publicize the program and made no real threat to catch those who didn't pay up.
Only $80,000 trickled in.
Two years later, the legislature authorized another try. This time, the state spent $400,000 on a nationwide publicity campaign. Tax-evasion penalties were increased by 50 percent, criminal sanctions were enhanced and the department's collection staff was increased, effective after the amnesty period expired.
The result was a $160 million windfall from taxpayers in 49 states and five foreign countries.
Tax experts believe the experience of Illinois and 17 other states that have initiated similar amnesty programs in recent years should serve as an example for those now enthusiastically embracing the idea at the federal level: It only works if it's done right.
And some experts warn the amnesty program may be more effective at the state than the federal level for a number of reasons. The state experiences, although generally successful, have not brought in as much money as gross figures might make it appear. And amnesty's effect on the morale of honest taxpayers remains unknown.
"You are dispensing the law and giving people an advantage and a break," said New York Gov. Mario Cuomo (D), whose state just completed a successful tax amnesty. "To do it on a recurrent basis is devastating. Our basic national problem is a deficit that's recurrent. This is by no means an institutional remedy."
Amnesty gives those who cheat on their taxes "an advantage over those who did it right the first time," said former IRS commissioner Jerome Kurtz.
The idea of amnesty is straightforward: In return for paying their back taxes, usually with interest, people are excused from the fines and penalties they normally would have had to pay as well.
The state amnesties usually have lasted a period of months. Some included all taxpayers who owe back taxes, even if they already were the subject of government collection efforts. Others covered only taxpayers who owe money but have not yet been found by tax collectors. The levies waived by amnesties range from criminal penalties only to all penalties and even some interest on the back taxes.
According to state officials, the elements common to the most successful programs were extensive publicity combined with stiffer enforcement and penalties for those who didn't take advantage of the amnesty.
In Massachusetts, for example, Revenue Commissioner Ira A. Jackson warned repeatedly that, after the amnesty, "it's no more Mr. Nice Guy." Even beforehand, state tax officials were confiscating luxury yachts and padlocking delinquent businesses, in part to get the public's attention. In New York, taxation department Commissioner Roderick C. Chu told taxpayers on television that they should "get to us before we get to you."
In California, state tax officials gave more than 1,000 interviews to journalists and produced seven television commercials on amnesty during the months that preceded their program. Illinois tax administrators advertised their amnesty in TV Guide, on the sides of Chicago transit buses and in The Wall Street Journal. Together, those four states collected more than $700 million in revenue during their amnesty periods.
"I can't emphasize too much that if you're going to get from 81 percent to 94 percent compliance, you've got to do all of these other things," said Massachusetts Gov. Michael Dukakis (D), who pushed the Massachusetts program during the winter meeting of the nation's governors here last week.
Most of the multitude of newly unveiled federal-amnesty bills include enhanced enforcement of the tax laws. The legislation proposed by Sen. Max Baucus (D-Mont.), for example, would add 10,000 examiners to the Internal Revenue Service and would double penalties for nonfiling, underpayment, nonpayment and fraud.
Sen. Frank Lautenberg (D-N.J.) has proposed a similar bill that would, among other things, increase penalties and deny federal contracts and licenses to companies that owe federal taxes. Sen. Alan Dixon (D-Ill.), the first sponsor of amnesty legislation, also would increase penalties and add IRS agents.
Estimates of the revenue that would be brought in by the amnesty bills, all of them fairly rough, range from $7 billion to $12 billion a year. Much of that would be a result of the compliance measures, not the amnesty, tax experts say. The Joint Committee on Taxation, the official revenue estimator for Congress, says it is impossible to calculate precisely what a federal amnesty program would bring in.
Nonetheless, the idea is catching on. Senate Majority Leader Robert J. Dole (R-Kan.) says it "deserves a look," and Senate Budget Committee Chairman Pete V. Domenici (R-N.M.) has included revenue from an amnesty program in a list of deficit-cutting options.
Treasury Secretary James A. Baker III, softening the department's longstanding opposition to a federal amnesty, says the idea is worth studying. An IRS study on the issue is in the works, but revisions are being made at Treasury's request because the idea has become more popular.
In a meeting with Dixon last year, President Reagan reportedly said amnesty sounded like a good idea. Rep. Richard A. Gephardt (D-Mo.), co-sponsor of a tax amnesty bill in the House, said it could be coupled with congressional passage of tax-revision legislation to give taxpayers a chance to wipe the slate clean before the system is changed. Baucus wants to attach his bill to the tax-revision measure soon to be considered by the Senate Finance Committee.
State officials caution about extrapolating their experiences to the federal level, however. Many of the state tax compliance systems jazzed up by the amnesty programs were unsophisticated and ineffective to begin with, leaving lots of room for improvement, they warn.
The magnitude of the states' expansion in enforcement -- some doubled the size of their tax-collection staffs -- probably is greater than what Washington could afford in a budget-cutting era. Already, the IRS has undergone staff reductions in the last few years, and the recent computer snafus have led more resources to be shifted to return-processing and away from audits and collections.
"I think people have to be able to get an answer to the question, 'If they didn't catch me before, why will they catch me in the future?' " said John Vranna, manager of the compliance development program for the California Franchise Tax Board. "Fear works better than guilt. Guilt works better than the notion of forgiveness."
Vranna, like other state officials, admitted that much of the revenue attributed to amnesty might have been collected without it.
IRS officials studying state data have found that as much half of the tax money that has come in as a result of some amnesty programs would have been paid without them. The unpublished IRS report found that relatively few of the delinquents who paid under state amnesty were not already federal taxpayers, raising questions about whether they would pay more under federal amnesty.
IRS Commissioner Roscoe L. Egger Jr. also worries that national amnesty could erode honest taxpayers' compliance with the tax laws.
Because federal taxes are so much higher than state levies, experts also question whether it would be worthwhile for nonpayers to use the program, especially if interest is charged.
"It's harder to urge people to come forward at the federal level because the tax liability is so much larger," said former IRS commissioner Kurtz. Another ex-IRS chief, Sheldon S. Cohen, predicted endless litigation from taxpayers trying to avoid routine enforcement procedures by applying for amnesty.
Kurtz, Cohen and state tax officials agreed that any amnesty has to be a one-time affair. If taxpayers expect the government will impose another one, they will fudge on their tax bills and plan to be excused, the thinking goes. "It's a narcotic," Cohen said. "Having taken it once, how do you avoid taking it the second time?"