How to pad state coffers without unpopular tax hikes?
Make scofflaws turn in what they already owe.
By spending $700,000, Gov. Dan McKee thinks the state can bring in $10.4 million in revenue by beefing up tax collection enforcement, according to his fiscal 2025 budget proposal. All that’s needed: a few more collections staffers and attorneys, new software, and a stronger dose of good, old-fashioned public shaming via the top-100 tax delinquent list.
It’s a fraction of the money needed to cover the proposed $13.7 billion fiscal 2025 spending plan, but much more politically palatable than tax hikes. And it’s a strategy that other states have found successful, especially with new technologies available, said Joe Starr, a spokesperson for the Federation of Tax Administrators.
“States that invest in human capital and technology while leveraging policies available to support their efforts yield greater returns in all areas of tax administration, including improving compliance and creating efficiencies that ultimately result in the protection, recovery, and generation of revenue,” Starr said in an email.
Of course, 100% compliance, while the goal, is elusive. Not all states report their uncollected tax revenue, and those that do use different terms to define what’s left on the table.
In Rhode Island, nearly $256 million in taxes due went unpaid, in fiscal 2023, equal to 4.9% of the $5.2 billion in total tax revenue owed, according to information provided by the Rhode Island Division of Taxation. Uncollected taxes hovered around 4% of total tax revenue due for each of the four prior fiscal years.
It’s not for lack of trying, said Neena Savage, state tax administrator.
“We’re not leaving money on the floor,” she said.
Indeed, tax evaders are a tricky bunch. Some have left Rhode Island, which requires out-of-state attorneys to take them to court. Some people or businesses simply don’t have the money to pay what they owe, tied up in lawsuits or bankruptcy filings.
Many of the offenders on the annual list of delinquent income taxpayers have made the cut for public shaming for years, even decades. The 2023 list is something of a who’s who of Rhode Island: former boxing champion Vinny Pazienza, who owns a home in Warwick, owes $446,000. Giovanni Feroce, a West Warwick native whose professional nosedive began with his ousting as CEO of Alex and Ani in 2014, and also includes a failed gubernatorial campaign in 2018, owes $1.4 million.
More than 40% of the personal income tax delinquents list out-of-state addresses, ranging from Seekonk, Massachusetts, to Ventabren, France.
‘We don’t know what we don’t know’
Still, new technology has made it easier to track the missing money, and recover it. Part of the estimated $700,000 implementation cost will cover hiring a vendor to help the state tax department with analytics models and data sets for better collection. A request for information was published Feb. 7, with responses due by March 6. The cost to hire a vendor is subject to state procurement rules, and has not been set yet.
“Right now, we’re just trying to see what technology and tools are available to us,” Savage said. “We don’t know what we don’t know.”
Savage said the division was also looking to other states as models for how to improve tax compliance, but declined to name specific states as examples.
One common problem experienced by states nationwide is finding and keeping employees, particularly those with accounting or law degrees which are needed for certain aspects of enforcement such as levies or liens to secure payment of tax debt, Starr said.
“The level of education and acumen required to perform these highly skilled roles demand high salaries, making it difficult for many state agencies to compete,” Starr said.
The state tax division has a 16-20% vacancy rate among its 223-person staff, which includes 45 people in the compliance and collections section, according to Savage. McKee’s budget proposal calls for hiring three full-time employees for “proactive collection enhancements” (for a total cost of $269,304) along with attorneys who are licensed in other states to enforce collections against non-Rhode Island residents.
The final piece of a beefed-up tax collection strategy: public embarrassment. Since 2003, the state has published an annual list of the top 100 personal income tax delinquents, adding a second category for the top 100 business delinquents as of 2011.
McKee wants to make both lists longer, expanding the criteria to anyone who is at least 90 days late on $50,000 or more, and is not in communication with state tax collectors about paying off their debt. This measure alone is expected to boost state revenue by $3.4 million, according to the budget proposal.
Savage was unsure how many people would qualify for the list based on a $50,000 debt criteria, but stressed the intention was not punitive.
“The idea is to get people to comply before they get to that point,” she said. “Most people don’t want to be on a public list.”
The Federation of Tax Administrators does not collect information on which states publish annual delinquent lists, and the criteria they use. In Massachusetts, any person or business owing more than $25,000 in state taxes makes the cut, with the option to search by municipality. The search option is not available in Rhode Island.
If approved, the changes to the tax delinquent lists would take effect in January. The House Committee on Finance is scheduled to hear from state budget analysts about the proposal on March 5.
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