House DFL spending plans hinge on uncollected taxes

The Office of the Legislative Auditor issued a report last March that highlighted what it termed "significant tax compliance problems" in Minnesota. The annual estimate included $600 million of unpaid income taxes and $450 million in unpaid sales taxes.

DFLer Mike Hatch highlighted the money as a potential revenue source during his unsuccessful campaign for governor. Now House DFL leaders want to use the "tax gap" as a way to pay for their priorities in the 2007 session.

Majority Leader Tony Sertich, DFL-Chisholm, doesn't specify the amount, but he says tighter tax collection will bring in more revenue.

"We're very realistic in understanding that the number is not $1 billion," Sertich said. "We could never recoup all of the money, but we believe there will be significant resources available in that and in the surplus to cover this cost."

The projected $2 billion state budget surplus shrinks considerably when inflation gets factored in. And the $1 billion in uncollected tax revenue is also less than it appears.

Dan Salomone, deputy commissioner of the Minnesota Department of Revenue, says $1 billion is only a theoretical estimate based on census data. He says the state doesn't know who the non-complying taxpayers are. Salomone says the uncollected tax money isn't real and should not be used for budget purposes.

"It's disturbing to me, because I don't want people to be thinking that with a few simple law changes they can rake in a billion dollars, and they can commit all that money to all this new spending that people want to do," Salomone said. "That's absolutely wrong."

Salomone says you get what you pay for when it comes to tax collections, and the more money the legislature devotes the effort the more successful it will be. He says previous efforts to beef up audits have returned more than $5 for every dollar spent. But Salomone says there are limits to such compliance efforts.

The chairwoman of the House Taxes Committee agrees. Rep. Ann Lenczewski, DFL-Bloomington, says she doesn't want to go too far trying to crack down on every taxpayer.

"You know a good and fair and efficient and effective and stable tax system also has be something a society can live with," Lenczewski said. "And there is a limit in compliance. That's why you can never get all the money your should because you'd have to have such a oppressive government, literally a tax regime, where Minnesotans would feel that the tax collectors are literally looking over their shoulder, every thing they're doing."

Still, Lenczewski wants her committee to revisit the Legislative Auditor's report and consider ways to increase state tax collections. The report recommended that lawmakers help identify non-compliant taxpayers by requiring all employers to file wage data in a common electronic format. It also suggested improvements in the system for answering taxpayer questions.

House Republicans share the goal of improving tax compliance, but they're skeptical about its potential payoff. Minority Leader Marty Seifert, R-Marshall, says he think Democrats have set their expectations too high.

"There's no way you're going to get a half a billion dollars out of compliance," Seifert said. "It just is unrealistic. Now, if you want to hire auditors to audit every garage sale in the state of Minnesota you can try that. But we want to be realistic about the results here, and you just at some point aren't going to be doing things like that."

The DFL-controlled Senate is also looking at ways to increase tax compliance as a way to fund state spending initiatives. Senate Taxes Committee chairman, Sen. Tom Bakk, DFL-Cook, says he thinks there's $200 million or more that could be squeezed out of the system. Bakk says he'll hold hearings on the issue sometime in the next month.

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