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| Michael Wynne |
In a sense, our businesses are sickened too, and it has made me recall when I dealt with sickened businesses before. I began my career prosecuting responsible officer cases. In an early case, after a judgment in my favor, before I headed to discuss a citation to discover assets with the defendant's counsel, the presiding judge waved me back to the bench. In a serious, grandfatherly tone, he leaned in and said, "Remember, you represent the people. The defendant is one of the people. You have a duty to him, too."
In a much broader context, the challenge this pandemic presents for tax policy and administration in the coming months and years is the balance between enforcement and fairness, between power and wisdom, which the judge bid me to achieve.
There is no state whose budget accounted for the fall in tax revenues and the spike in costs occasioned by the pandemic and the measures to tame it. The pressure on the states to raise revenue will be unprecedented. The uncertain duration of the crisis, and the murkiness of what lies ahead economically, make it exceedingly difficult for a state to wield power to raise revenue and discern where that wise balance lies between its needs and those of the taxpayer.
However, I recall from my earlier experiences that while motive was not an element of the case against a responsible officer, it was a factor in how I viewed my duty towards a defendant after judgment.
Some defendants planned their behavior before the business first opened its doors, while necessity to keep the doors of the business open is what drove the behavior of others. Both types were liable, but in that latter group I sometimes found, in the interest of the state and of the taxpayer, a reason to strive for balance and exercise restraint. This crisis presents similar reasons.
Much like hospitals can be overwhelmed by patients in a pandemic, tax agencies can be overwhelmed by the targets of automated enforcement. The rule of the day for tax agencies is to maximize voluntary compliance so that the most revenue is paid voluntarily, timely and completely, without the need for enforcement. Enforcement against a taxpayer is therefore an exception.
In a sudden downturn, enforcement as usual will swallow the rule and produce such a mountain of exceptions that dealing with them may clog the agency's system for years. Much like our public health officers are taking measures to avoid a spike in patients that will overwhelm hospitals, a tax agency needs to take steps to avoid an otherwise expected spike in enforcement that will overwhelm and clog the agency. The state's interest is served by the exercise of some restraint on its enforcement and collection powers.
Processing routines should be programed to preempt, or to immediately abate, penalties imposed for late filing and late payment during the recovery. For state budget purposes, penalties are not a quantified component of estimated revenues. Moreover, there is no deterrent or enforcement purpose served by a penalty where companies were ordered to close, including those businesses that provide tax services, and all businesses are struggling to regain normalcy.
Automated imposition of penalties will unfairly cast and burden businesses as delinquent, and clog the agencies' systems with proceedings to abate or settle the enforcement of the penalties. The day will come again to automate the penalty system for deterrence, but that day ought not come in the next few months.
Interest on tax deficiencies is often not tied to the prevailing market rate, but fixed by statute. When so fixed, it is a notional, and inaccurate, reflection of the time-value of money. When interest rates drop, those fixed rates become punitive — like pouring water on a drowning man.
For instance, Cook County and the city of Chicago have temporarily, and rightly, stopped the accrual of interest at 12% per year on tax deficiencies. But that is not enough.
There is no reason to restart the meter at 12% when the Federal Reserve has dropped the rates to zero. Indeed, why not turn back the meter for a number of years and erase unpaid interest debts that bear no relation to the time-value of money at any time in the last decade? Restarting the meter at 12% may take all the fight out of a business struggling to stay afloat. Reducing the load may give a business the push to give it another go.
Courts and administrative hearings divisions are closed for an indefinite period at this time. Protest periods could be stayed as of the date of the emergency and restarted when the agency is actually able to process protests. But not all businesses may be back to full function by that date.
Instead, a several months' long liberal policy to grant rehearings on assessments and notices expiring during the shutdown, and even a bit past the end of the shutdown, may avoid a mountain of actions to vacate or enjoin enforcement of finalized assessments, or to reinstate permits or licenses, and similar actions.
Payment plans are one outcome of tax collection actions. But, why wait for enforcement? Negotiating before defaulting is common in business generally — especially during downturns. So why not for taxes of businesses savaged by such a rare catastrophic economic event?
Negotiating a payment or workout plan with the tax agency before the agency has to take enforcement action, and before the business sees no recourse but bankruptcy, may give the business the breathing room to pay suppliers, employees and lenders, to grow and eventually generate more revenue. The agency may not only achieve a better outcome than it would in bankruptcy, but it can also devote its limited collection resources on those taxpayers who evade tax collection.
When William Shakespeare wrote that the "quality of mercy is not strain'd" he deemed mercy most impactful when shown by a sovereign. An unprecedented need for revenue could justify the state's full use of its power to collect delinquent taxes, penalties and interest, to revoke registrations, to shutter businesses and levy upon assets. But these are not usual times, and mercy may be more impactful than enforcement as usual to yield more and steadier revenue.
For a business that was not delinquent before the pandemic, pushing it over the edge to collect taxes is like felling a tree to get the fruit. The economy can, and should, be seeded with incentives, grants and loans for new businesses, and some of these may eventually yield revenue; but some businesses not yet withered may still produce revenue if they are pruned rather than felled.
Mercy, Shakespeare said, "blesseth him that gives and him that takes." New businesses, when they come, are unknown propositions. That is not so regarding the businesses that were thriving the day before the emergency shutdown orders were issued.
Those businesses may be best positioned to generate revenue when the emergency ends, having retained the goodwill of customers, a workforce eager to return and suppliers to whom they present a known and preferable risk to that of a new business. Such businesses, too, have likely retained the traits that earned them good standing.
Whether by administrative discretion where possible, by executive order where necessary, or by emergency legislation, a state's revenue needs may be best served by showing mercy to such businesses. Mercy shown without lines, applications, waits and agonizing uncertainty. Mercy that is certain and publicized, or, better yet, doled out. As Shakespeare concluded, let it "droppeth as the gentle rain from heaven."
Michael J. Wynne is a partner at Jones Day.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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