In Philly, tax enforcement vs. tax amnesty

The School District of Philadelphia District Headquarters building at 440 North Broad Street. (File photo)

UPDATE: Since yesterday's column about "double taxation" of small-business income by the city, more business owners have called to say they're planning to leave. One is Peggy Stephens, owner of Premium Steap, a tea store on 18th St. in Center City, who tells me she was "blindsided" by the city's stepped-up School Income Tax enforcement (atop the Business Income Tax she was paying on the same income). "I can't afford to be in business when I just barely made a profit," she told me. "In a few years, residents will only have big-box stores, and celebrity-chef restaurants. It's sad that the small, unique neighborhood store will be a thing of the past."

EARLIER: With Philly taxpayers, force works better than persuasion: Frank Paiva, chief counsel for Philadelphia's Revenue Department, tells me that increased enforcement of the School Income Tax (leaving aside whether you like the tax or no) works better than tax amnesty, like the city tried back in 2010, in prodding city taxpayers to pay what they owe. Writes Paiva:

"Prior year School Income Tax delinquent collections in fiscal year 2014 shot up to $7.4 million, from $1.3 million (the year before.) This increase of $6.1 million is directly attributable to increased enforcement of the School Income Tax.

"In comparison, the City realized an increase of only $500,000 in delinquent School Income Tax when it offered tax amnesty in FY 2010. In that year, delinquent collections rose to $1.9 million, from $1.4 million, year over year."

The lesson: "Increased enforcement drives much higher collections and promotes increased tax compliance on a going forward basis, because of the disruption in the status quo that enforcement creates.

"After increased enforcement, there is an increased awareness among citizens of their obligations. And tax advisors are more likely to make sure their clients are aware of the penalties associated with noncompliance.

"In comparison, tax amnesty, which some find to be fashionable, produces nominal increases and little, if any, changes in behavior.

"Bottom line: Increased enforcement promotes tax compliance, as it changes behavior."