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Two Tales of Tax Collection

As published in the San Diego Daily Transcript

by Vince Vasquez

Thursday, September 9, 2010

Last week, the city of Riverside began a key tax compliance program that promises to increase government revenue and the number of business taxpayers without increasing taxes. Their expeditious efforts to launch the program stand in stark contrast to the city of San Diego's fumbled attempts to achieve the same policy objectives. With greater budget cuts and revenue shortfalls on the way, San Diego City Hall should give greater consideration to supporting a new business "tax amnesty."

Tax amnesties are a policy whereby taxpayers are allowed for a limited time to repay part or all owed tax debt without fear of financial penalties or prosecution. Amnesty programs are popular with cash-strapped governments, who net new revenue and taxpayers through the process, as well as delinquent enterprises, which may be facing thousands of dollars in late fees and interest for unreported income or unlicensed businesses. Though they vary in size and scope -- some amnesties mandate back taxes to be paid with interest, while others simply require current business license taxes to be paid -- they all take a business-friendly approach to solving a major problem that may be costing municipalities millions of dollars in funds for parks, libraries and public safety services. With budget pressures mounting, elected officials in Riverside took decisive action (unlike other cities) to protect the interests of taxpayers.

Whereas the San Diego City Council has spent this summer rubberstamping a financially-bereft new Central Library, plotting over sales tax hikes and vacationing out of town, the Riverside City Council has used its time to strategize over a new business tax amnesty program. Most typical small businesses in this inland town of approximately 300,430 residents pay a minimum business license tax between $108 and $130 each year, which may not seem like a lot, but in total the tax provides more than $5 million annually for the General Fund. Riverside's decision to launch a business tax program follows a long list of cities that have introduced similar programs in the last 18 months, including Los Angeles, Fresno, Santa Ana, Philadelphia, Oakland, Tucson, Phoenix, Glendale and Colorado Springs.

On Aug. 24, the Riverside City Council unanimously approved the six-month amnesty program, along with a new public outreach program to inform the business community about local business tax laws. Beginning Sept. 1, unlicensed businesses will be given six months to pay up to three years' worth of back taxes to the city, penalty free. Exactly how to ramp up tax compliance after the amnesty ends was a difficult decision for Riverside, particularly as adding staff was determined unfeasible. City staffers met with employees and board members of the Greater Riverside Chamber of Commerce to brief them on the program, and solicit input on how to best notify local business owners of a potential tax liability in "the most appropriate and least intrusive way." Staff ultimately recommended contracting with a private third party and tasking them with mailing an "information request letter" to a targeted list of medium-sized businesses, and asking them to voluntarily identify their vendors, which would be cross referenced against the city's database of licensed businesses, and subject to future tax liability notifications.

In all, it took less than 2 1/2 months to introduce, review and approve the amnesty program in Riverside. City staff estimates that once the program is completed, new annual recurring revenue is likely to exceed $1.5 million. Compare Riverside's policymaking experience with the city of San Diego, which has defiantly tabled a business tax amnesty proposal (introduced by Councilmember Carl DeMaio) for over 18 months. Instead, the path taken to improve business tax compliance in America's Finest City has been wasteful and clumsy, harming city taxpayers and law-abiding business owners.

In 2009, the city of San Diego mailed out 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 identified supposed owed back taxes, late fines and other penalties that could range in the hundreds or thousands of dollars; however, the overdue balances were later revealed to be widely inaccurate. As Councilmember Sherri Lightner pointed out in a later May 2009 memo to the City Council, "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 by the treasurer's office in its hasty collections attempts. As of the publishing of this column, the effectiveness of the notification letter campaign has been undetermined and unannounced to the public.

Will San Diego City Hall consider approving a tax amnesty? It's uncertain, but if councilmembers green-light the program in the future, they could stand to gain millions in new revenue. In 2009, the city of Los Angeles announced that 8,673 businesses participated in the three-month amnesty program, resulting in $18.6 million in paid taxes. The largest revenue haul on record was earned by the City of Philadelphia, which in July 2010 ended an eight-week amnesty program that collected more than $40 million (after expenses) from 27,473 tax delinquents. With such potentially lucrative outcomes, tax amnesties are at least worthy of an open public debate at San Diego City Hall, which should be docketed soon, as municipal officials are projecting a $72 million budget deficit next year.

San Diego's small business community deserves our unwavering support in this difficult economy -- outreach efforts from our local government should reflect that commitment. It is my sincere hope that San Diego City councilmembers will work to reduce the level of bureaucratic noise emanating from City Hall, and engage business owners with the respect and collegiality they deserve.