Lending a helping hand: two governments can work together.

Another tool used effectively by the federal government and states to combat tax shelter abuses are voluntary compliance initiatives (VCI), or amnesty programs. The IRS has offered several targeted amnesty programs to resolve specific abusive transactions. (27) Several states have offered their own amnesty programs that covered a much wider variety of transactions. These early efforts benefited greatly from federal efforts, particularly the IRS' success in identifying and publishing the details for abusive "listed" and other "reportable" transactions. However, these early state programs differed on who could participate, the transactions covered, the length of the program, the opportunity to file for refunds, and other important program elements. (28) In May 2007, the MTC announced a coordinated amnesty program in which 21 states participated. Although the success of the program is currently unknown, the MTC effort is a great example of intergovernmental cooperation. Taxpayers benefit from having a single set of rules and a chance to "come clean" with many states with a single filing. The participating states are also winners as they can use the publicity of such a large program to reach affected taxpayers, and the MTC administers and coordinates the program. Furthermore, the large number of states involved in actively sharing information on taxpayers and promoters should increase the participation rates of taxpayers choosing to voluntarily come forward. While states had to agree on many of the specifics of the program, each could specify the extent of the penalty relief offered to taxpayers, an important variable to lawmakers.

CONCLUSION

Technology advances and the advent of electronic filing make information transfers efficient and accurate, and governments at all levels are sharing routine information of all kinds. The proliferation of aggressive tax avoidance schemes threatened the viability and integrity of the income tax system, and the states and federal government came together to jointly fight that threat. Similarly, the growth of electronic commerce threatens sales tax revenues across states. States are willing to yield some autonomy regarding the base and local rates to preserve the fairness and viability of the sales and use tax. It is not yet a guarantee that the federal government will step in to require sales/use tax collection from remote vendors, but even without federal action, large retailers seem to be willing to cooperate when their compliance burden is made manageable.

The keys to future cooperative efforts can be seen with the successful current efforts. Taxing authorities have been able to identify areas of common interest where the loss of autonomy is outweighed by protecting the overall revenue source. (29) Going forward, states and the federal government should continue to search for areas where harmonization can occur without sacrificing each government's autonomy and the essential elements necessary to achieve tax policy goals. Reaching agreement on how to treat these items can improve the overall tax system without jeopardizing the benefits of subnational taxing autonomy.

Acknowledgments

We appreciate helpful comments from Bill Fox and Matt Murray.

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Harley Duncan

Federation of Tax Administrators, Washington DC, 2001

LeAnn Luna

Department of Accounting, The University of Tennessee, Knoxville, TN 37996

(1) See Fox and Swain (forthcoming) for a discussion of horizontal and vertical externalities that occur between governments at different levels in a federal structure.

(2) Hildreth, Murray, and Sjoquist (2005) demonstrate circumstances where states are not likely to participate in cooperative tax policy.

(3) We do not attempt to provide a comprehensive list of all federal and state interactions, but we provide examples to illustrate the different types of cooperation.

(4) Currently individuals can deduct the greater of state and local sales/use taxes or state and local income taxes.

(5) See Stark (2004), who argues that the deduction for state and local taxes impedes a central tenet of fiscal federalism.

(6) Of course, taxpayers subject to the Alternative Minimum Tax receive no benefit from deductibility (see Reuben (2005)).

(7) For example, see Holtz-Eakin and Rosen (1990), who show that the deductibility of property taxes leads to a higher proportion of property taxes in local budgets.

(8) There have been a number of proposals to eliminate or limit the deductibility of state and local taxes for federal income tax purposes.

(9) See Slemrod and Sorum (1984) and Blumenthal and Slemrod (1992) for studies on federal individual income tax compliance. See Slemrod and Blumenthal (1996) and Mills, Erickson, and Maydew (1998) for studies on federal corporate income tax compliance.

(10) Some states are choosing to decouple from Section 199 (i.e., production deduction) regardless of the revenue impact (see Lippman and Amitay (2005)).

(11) State inheritance, estate and gift tax receipts averaged less than 1.5 percent of state revenues in 2000 (Burman and Hoo, 2006).

(12) State tax statutes likewise authorize the exchange of return information with other states and with the federal government under appropriate safeguards.

(13) In the past, there was more cooperation between state and federal officials. More recently, the federal Bureau of Alcohol, Tobacco and Firearms has been preoccupied with the activities of paramilitary militias and anti-terrorism activities.

(14) Federal law regarding collection of delinquent taxes complicates efforts to share or jointly conduct collection activities. For example, federal statutes prohibit entities other than the IRS from collecting federal delinquencies. They also prevent the IRS from sharing any proceeds it might collect until all federal tax debts are satisfied. Legislation that would ease this process is under consideration. In one cooperative venture, about 30 states will withhold (i.e., levy and attach) a state income tax refund to satisfy a federal tax delinquency.

(15) The SITLP only applies to state individual income tax refunds but may include business tax refunds in the future.

(16) California, Maine, Massachusetts, and Minnesota accept electronic returns directly.