Is a Tax Amnesty for Delinquent Filers in the Offing for New Jersey?

If passed by Legislature, the proposal would eliminate some fines and penalties, but would not reduce the principal owed

Assembly Speaker Craig Coughlin
It looks as if there may be a tax amnesty in New Jersey this year for those who owe the state back taxes.

Democratic legislative leaders have inserted a new revenue-raising proposal into this year’s budget discussions, suggesting New Jersey could raise millions of dollars through a temporary tax-amnesty program for those who are behind on their state tax bills.

The new tax collection proposal was put forward by Assembly Speaker Craig Coughlin and Assemblyman Robert Karabinchak (both D-Middlesex), with the backing of Senate President Steve Sweeney (D-Gloucester) late last week. It would seek to generate cash already owed to the state by waiving some fees and penalties to make it a better deal for tax delinquents.

It would begin on July 1, and last for three months. Anyone behind on taxes owed for the period between January 1, 2014 and December 31, 2016, would be eligible to participate, as long as they are not under criminal investigation.

Tax collection initiatives
The state has administered several tax collection initiatives over the past few decades to raise one-time revenues for the annual budget, and they’re usually offered in the midst of a revenue shortfall or some other big fiscal dilemma. This year, however, state tax collections seem to be keeping pace with revenue estimates, but lawmakers are nonetheless proposing the amnesty program as they remain reluctant to embrace the full $1.7 billion in tax hikes that Gov. Phil Murphy, a Democrat, has proposed to support his fiscal year 2019 spending plan.

“What brought it forward was trying to find every dollar we can,” Coughlin said during an interview on Friday when asked about the timing of the proposal. “That really was the simple rationale for it.”

For his part, Murphy is so far calling the proposed tax-amnesty program a “good idea,” while also raising concerns about the state returning to an old habit of balancing annual spending with too many one-time revenue sources, a practice that has been flagged in the past by credit-rating agencies and other fiscal-policy watchdogs.

In all, New Jersey has offered nearly a half-dozen tax-amnesty programs under the administrations of both Democratic and Republican governors since 1987, when Republican Gov. Thomas H. Kean raised $87 million from tax delinquents. Republican Gov. Christine Todd Whitman collected $244 million from a 1996 collection initiative, and Democratic Gov. Jim McGreevey tallied $277 million from a 2002 amnesty program. But it was Democratic Gov. Jon Corzine’s 2009 tax amnesty that was by far the most successful, raising $725 million for a state budget that was leaking revenue as the recession took hold. By contrast, a limited collection initiative administered in 2014 by then-Republican Gov. Chris Christie raised just $75 million.

Rewarding late payers

Despite the state’s history of successfully using tax-amnesty programs to bring in extra cash, they have also drawn criticism from some lawmakers as the waiving of penalties can effectively result in rewarding those who are behind on their taxes. And if the state offers amnesty programs too frequently, it can allow those with huge penalties to just sit back and wait for the next break. Christie himself was a loud critic of the amnesty program run by Corzine — labeling it a “gimmick” and “haphazard governing” — before deciding to do his own limited collection initiative in 2014.

In an interview Friday, Karabinchak said even though the state is not in the midst of a recession, it makes sense to try a tax-amnesty program in good economic times because there may be an incentive for delinquent taxpayers, including businesses, to get unpaid tax obligations off their books while they have the means to do so.

“In good times, I think it’s easier for people to jump on this,” said Karabinchak, who owns his own business.

“You want a nice, clean slate,” he said.

Under the program being proposed by Karabinchak and Coughlin, which would need to be enacted through legislation, interest on back taxes would still be owed by taxpayers, but the enticement to pay up would be the state’s waiving of recovery fees and some other penalties. A 5 percent penalty would also be faced by those who decide not to take advantage of the program during the three-month window.

The backdrop for this year’s tax-amnesty proposal is Murphy’s push to enact a $37.4 billion fiscal 2019 budget that would increase several taxes to help support more investment in key areas like K-12 education, public-employee pensions, and mass transit. Among the tax hikes Murphy is proposing is the restoration of a 7 percent sales tax and the establishment of a 10.75 percent personal income-tax rate on earnings over $1 million.

No raises for Sweeney

Sweeney noted the adoption of a tax-amnesty program would provide one way to raise revenue “without raising taxes.”

“We have to maintain an open mind and a receptive attitude towards the best ideas to address the state’s needs, and this idea will be an effective way of capturing revenue that is already due,” he said.

It’s unclear how much revenue is currently owed by delinquent taxpayers in New Jersey, and Karabinchak said lawmakers have not engaged in direct talks with the Department of Treasury to get its best estimates. Typically, the state’s haul is reduced when a tax amnesty is offered within just a few years of the most recent collection effort.

Also having the potential to cloud matters is a multipronged modernization of the Division of Taxation that was launched in 2017, Christie’s last full year in office. Former Treasurer Ford Scudder told lawmakers last year that the division would be engaging in “more analytic and strategic collections and enforcement” as part of the effort, which was expected to raise $200 million.

Meanwhile, there’s also Murphy’s concern about the state’s long-held use of one-time revenue sources to help sustain annual spending. The new governor has taken pains to address that issue in his fiscal 2019 budget plan, with one-time sources right now accounting for less than 1 percent of total spending.

Speaking after a bill signing at Point Pleasant Beach on Friday, Murphy spoke generally in favor of the tax-amnesty suggestion, but he also raised the issue of it being a nonrecurring source of revenue.

“The only hesitation we’ve got is we’re trying like heck to get off one-off solutions, so that’s a concern,” he said.

“It’s a good idea, it’s one that needs consideration, and count (me) in as someone who will consider it, with that one important caveat,” Murphy went on to say.