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A Tax Amnesty Could Help City Hall

as published in the San Diego Union-Tribune

by Vince Vasquez

Monday, December 6, 2010

Proposition D may have been defeated on Election Day, but San Diego City Hall still has viable options to raise new tax revenues. With an estimated $72 million budget shortfall, now is the time for elected officials to take a different approach that could add thousands more taxpayers onto the city ledger.

At issue are “tax amnesties,” a policy whereby taxpayers are allowed for a limited time to repay part or all owed tax debt without financial penalties or prosecution. Amnesty programs are popular with municipal governments, which net new revenue, taxpayers, as well as delinquent enterprises, which may have accrued thousands of dollars in late fees and penalties for unreported income and unlicensed businesses.

Though they vary in size and scope, tax amnesties all take a reasonable approach to solving a major problem that could be costing municipalities millions of dollars that would otherwise be used for parks, libraries and public safety services.

With high unemployment sapping consumer spending and tax receipts across the nation, many cities have introduced amnesty programs in the last two years, including Los Angeles, Fresno, Philadelphia, Oakland, Tucson and Phoenix. Most recently, in August the Riverside City Council unanimously approved a six-month amnesty program, which was formed with input solicited from the local chamber of commerce. Now, unlicensed businesses have six months to pay up to three years’ worth of back taxes to the city, penalty free. City staff estimates that once the program is completed, new annual recurring revenue is likely to exceed $1.5 million.

In all, it took Riverside City Hall less than 2 1/2 months to introduce, review and approve the amnesty program. Members of the San Diego City Council could similarly spur action, but they regrettably gave a chilling reception to a tax amnesty proposal introduced by Council member Carl DeMaio nearly two years ago. This has only been compounded by the policy route taken by the city treasurer’s office to improve tax collection, which has been wasteful and clumsy, confusing city taxpayers and law-abiding business owners.

In 2009, the city mailed more than 41,000 notification letters en masse to individuals who reported self-employed or contractor income to the state of California but lacked a current city business license. These letters ostensibly identified owed back taxes, late fines and other penalties that could range in the hundreds or thousands of dollars. However, these overdue balances were later revealed to be widely inaccurate. As Council member Sherri Lightner pointed out in a May 2009 memo, “The treasurer reports that 75 percent of those notified are actually in compliance and do not have to pay the fee.” City law allows for numerous exemptions to paying the business tax, particularly for infrequent contractors, which apparently was overlooked in the haste to raise revenue.

How much could San Diego raise with a tax amnesty program? Recent evidence suggests the haul could be substantial. In 2009, Los Angeles raked in $18.6 million in newly paid taxes from 8,673 businesses, and in July of this year Philadelphia netted more than $40 million from 27,473 tax delinquents. It’s worth finding out the answer, particularly as most other short-term revenue-generating ideas, such as selling surplus city property, were exhausted years ago by city leaders in better economic times.

To be sure, there are bigger issues at stake than tax amnesties at City Hall. Elected officials and special-interest groups are now fighting tooth-and-nail for control of the core direction of San Diego’s fiscal recovery. Will our future be marked by the pursuit of more compulsory solutions, such as fee and tax increases, or will city leaders heed the lesson of Proposition D and embrace voluntary solutions as well? Amnesties are just the tip of the iceberg for what’s possible when citizens and businesses are asked, rather than made, to help the city heal. Moving forward, it’s critical that the City Council to evaluate the role volunteers and public-private partnerships have in preserving neighborhood parks, libraries and recreation centers.

Make no mistake – $72 million is a large hole to fill, but every additional dollar helps. While San Diegans wait for the comprehensive structural reforms that will truly fix our financial mess at City Hall, voluntary programs like tax amnesties deserve greater consideration in the interim.