Former revenue director: Mississippi losing ‘tens of millions’ in uncollected business taxes each year

Story by Geoff Pender, Mississippi Today 

Mississippi lawmakers in May approved $60 million in COVID-19 relief grants to small businesses with the goal of quickly circulating $2,000 each to more than 29,000 shops shuttered temporarily by the pandemic.

The federally funded grants were to be automatically given to a long list of small businesses including restaurants, barber shops and clothing stores. The only caveat: those businesses had to have filed their 2018 or 2019 state income tax returns.

About 25% — more than 7,200 — had not and were disqualified.

This brings up an age-old issue: Many Mississippi businesses don’t pay their tax bills, and the Department of Revenue lacks the manpower and budget to audit and collect.

“People who pay on time are being abused by the cheats,” said Herb Frierson, who recently resigned as revenue commissioner, not long after he reported the COVID-19 grant tax issue to lawmakers and not long after the Legislature cut the Department of Revenue’s budget by about 5%.

“It makes me wonder why anybody pays at all,” said Frierson. “We don’t have enough auditors … The CARES Act grant issue gives us a clear indication of how large the problem is.”

In a poor state continually hurting for revenue, and with a Republican controlled Legislature that vehemently opposes tax increases and that has approved dozens of tax cuts in recent years, collecting delinquent taxes could be a major budget boon.

Frierson for years lobbied the Legislature for funding, as did his predecessor, to hire more tax auditors. His pitch was that spending a few million dollars to hire more auditors would net the state tens of millions more in revenue — without raising taxes, just making people pay what they owe.

But lawmakers have been reluctant to allow the tax man to hire more auditors.

“The Legislature doesn’t care,” Frierson said. “They don’t want the phone calls from constituents who call and complain if we go after taxes owed. They just look at the lack of state revenue and whine that it isn’t enough.”

In 2012, the Legislature approved former DOR Commissioner Ed Morgan’s request for $3.5 million to hire more auditors. Morgan promised lawmakers DOR would increase collections by $10 million that year.

Collections increased $81 million.

The following year, lawmakers cut DOR’s budget. They technically authorized the extra auditors Morgan requested, but didn’t fund them.

At the time, Morgan lamented: “It doesn’t make economic sense … We collect money. If private-sector people were running this, they’d be coming to us wanting to give us $10 million more.”

Ironically, an economic slump and dozens of tax cuts passed by lawmakers resulted in revenue shortfalls that forced drastic cuts over several years to state agencies, including DOR.

Frierson said: “Accounts receivable are down, so the board of directors has cut the accounts receivable department. That’s how you would put it in business terms.”

Newly appointed DOR Commissioner Chris Graham through a spokesman declined an interview. But the agency in a written statement said it currently has 100 district auditor positions, with 31 vacant. It said the agency doesn’t anticipate having to further cut staff with the Legislature’s 5% cut to its budget this year.

No one appears to have a firm estimate on how much money the state “leaves on the table” in uncollected taxes each year, but Frierson said it’s easily “tens of millions.” Morgan’s collecting $81 million would appear to bear that out.

DOR’s statement said the IRS estimates the “tax gap” of paid versus owed is between 15% and 18%. DOR said that over 90% of state tax audits in 2020 “resulted in a change to the taxpayers’ liability as reported.”

Frierson said another issue is that when DOR identifies tax fraud, local prosecutors in many counties are reluctant to prosecute it, resulting in millions more uncollected taxes and penalties.

“Prosecutors go to the Capitol begging for more money, but they don’t want to prosecute tax cases that could bring in more money,” Frierson said.

House Ways and Means Chairman Trey Lamar, R-Senatobia, said Frierson’s report of 25% of the CARES Act grant small businesses being disqualified for back taxes “raised some eyebrows” among lawmakers.

“We’ve got a problem in this state, particularly with a lot of cash-businesses that just aren’t paying taxes,” Lamar said.

Lamar said he plans to help tackle the issue and consider approving more DOR auditors, “as long as things are done in a fair way for taxpayers, which at certain times in the past audits were not always fair.”

But Lamar said broader, structural tax reform is likely a better solution.

House Speaker Philip Gunn and other legislative leaders have for years advocated shifting the state’s taxing from income to “user based,” like sales or use taxes.

“When you’re dealing with a lot of cash income, people are just going to hide it, and it’s difficult to audit,” Lamar said. “A sales tax is much easier to audit – through cash registers and other easier ways to follow the money.

But efforts to shift Mississippi’s tax structure more from income to consumption based have fizzled.

Opponents say consumption taxes are “regressive,” hitting hardest for people of low or middle income, which is most Mississippians. They note that at 7%, Mississippi’s sales tax is already relatively high.

Instead of broadening the base for sales and other consumption taxes, lawmakers over the years have granted myriad breaks and exemptions to various groups and industries – at times seemingly anyone with a good lobbyist. This increases the regressive burden on rank-and-file Mississippians who don’t get such a break.

But Lamar said a look at other states in the region shows that those that cut or eliminate income taxes and shift to consumption taxes have had booming economies.

“There’s no place growing faster than Nashville, Tennessee,” Lamar said.

Lamar said consumption taxes are fairer, and everyone pays them.

“Even the drug dealer on the street with a wad of cash in his pocket is going to have to pay a sales tax,” Lamar said.

This article first appeared on Mississippi Today and is republished here under a Creative Commons license.