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By Mark Schwanhausser, San Jose Mercury News

Calif. Knight Ridder/Tribune Business News

Apr. 12 - State lawmakers will unveil a sweeping tax-amnesty program today that will take aim at California's enormous "underground economy" to narrow the state's yawning budget deficit.

The plan -- the state's first broad amnesty program in 20 years -- would raise an estimated $500 million or more from individual taxpayers, corporations and underground-economy scofflaws such as restaurants, contractors, car dealers, repair shops and Californians who make billions of dollars of under-the-table cash and barter transactions.

Lawmakers turned to the amnesty plan to help fix the state's $12 billion budget deficit.

"We face some dire fiscal issues and rather severe cutbacks," said Assemblywoman Judy Chu, D-Monterey Park, who will detail her amnesty plan today in Sacramento. "Yet there are tax cheats out there starving the state of money. This is a way of getting that income and giving them an incentive to do what's right." Tax-amnesty programs are hardly a new idea when money gets tight.

California raised $154 million in 1984-85 with a similar amnesty program. And 20 states have granted amnesty in just the past three years, with New York and Illinois raising more than $500 million each last year, according to the Federation of Tax Administrators.

Moreover, Chu's news conference comes in the final days of California's hugely successful amnesty for tax-shelter cheats. That program had raked in $211 million by Friday -- more than double the original goal -- and tens of millions of dollars more are expected before the amnesty expires Thursday.

"If it's done right, an amnesty can be a useful tool for non-compliant taxpayers and a boon for government," said Jon Coupal, president of the Howard Jarvis Taxpayer Association. Coupal declined to endorse Chu's plan, however, before he could analyze the details.

Chu's proposal comes as state lawmakers are waging bitter partisan debates over the best combination of spending cuts and tax increases to balance the budget for the fiscal year that begins July 1.

Her amnesty plan was developed with Controller Steve Westly, who last month outlined a three-point plan to collect more of the estimated $6.5 billion in taxes that will slip through the cracks in 2004. In addition, Westly is:

--Working with other lawmakers to draw up bills that would raise as much as $90 million by providing state tax auditors with better tools to track possible cheaters. For example, Westly wants to enable auditors to study property-tax records to identify homeowners whose reported incomes appear to be inadequate to support their mortgage or property-tax payments.

--Pressing the state Franchise Tax Board to make internal changes that shake out as much as $90 million more. Principally, he wants the state to resume charging taxpayers with misdemeanors if they don't report their full income, a practice essentially dropped during the flush 1990s. He also favors creating a "whistle-blower" program to reward Californians who tip off the state to large tax evaders and conducing audits of tax preparers who knowingly prepare false tax returns.

"I don't want to see one school program cut or one tax raised until we collect the taxes already on the books," Westly said.

Chu's proposal (AB 2203) would cast an even broader net than the amnesty that netted 147,000 individual scofflaws two decades earlier. Corporations would also be eligible, and it might be extended to cover sales and use taxes as well.

The amnesty would apply to taxes owed through 2002 -- but not to taxes due Thursday for 2003 tax returns. The window to confess would last only two to three months, probably from January to March 2005.

But with the carrot of amnesty would come a number of sticks designed to induce scofflaws to come out of the shadows. Chu's bill would sharply raise penalties and interest charges. She would give auditors more time to identify and hunt down cheaters by extending the statute of limitations. She would improve tools to trace payments to independent contractors. And she intends to shame the most notorious tax evaders by posting their names on the Internet.

She is also seeking a 10-year moratorium on future amnesties to discourage scofflaws from thinking they can just wait for the next amnesty.

The Franchise Tax Board's preliminary estimates indicate the state would pull in $545 million over a four-year period from the amnesty.

But the vast majority of that is money that the tax board figures it would pocket anyway through its usual programs to audit returns and collect taxes. Based on evidence from amnesty programs in other states, the tax board estimates that only 10 percent would be "new money," down from 22 percent in the 1984-85 amnesty.

Experts say that's fine if the goal is to accelerate tax revenues when the state is desperate for cash, but it suggests that the amnesty would barely dent the huge underground economy. It also raises questions about Westly's estimate that the amnesty would net $190 million to $230 million from the underground economy.

"The big money is from the chiselers, the people who make $40,000 but report $30,000," said Roy Crawford, special counsel for Heller Ehrman, a tax law firm. "How do you deal with carpenters, the gardeners, the people who live in the cash economy? That's the tough one." Still, Crawford added, "An incremental gain is a gain."

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