Monday, July 16 , 2018, 5:18 pm | Fair 75º

 
 
 

Harris Sherline: Stealth Taxation in the Form of Fines, Penalties

Government agencies can use the money at their discretion without any public accounting

Finding ways to tax us without our being aware of it often seems to be the name of the game for politicians and bureaucrats, and sometimes the obvious becomes obscure.

For example, we usually don’t think of the fines that are generated by our local police or sheriff’s department for traffic and other infractions as taxes, or city and county fines for violations of building codes, or Occupational Safety and Health Administration fines for workplace safety violations, or Federal Communications Commission fines for inappropriate radio and TV programming. Many of these fines can be exceedingly harsh, especially for small businesses or nonprofit organizations, such as hospitals.

Just about every conceivable government agency levies some sort of fine for some sort of violation of some rule. Does anyone ever ask where that money goes?

Although estimates of potential revenue from these sources are included in the annual budgets of most government agencies, they are really just another form of stealth taxation and, as far as I know, other than city councils, county boards of supervisors and the like, not one citizen of any community ever votes for them.

One interesting example is the forfeiture of property connected with violations of drug laws. For example, it has been possible to confiscate and sell an automobile because a person’s son or daughter happened to be caught with a marijuana cigarette while using the car, even if the parent(s) knew nothing about it. Or a rental property, where a tenant was caught dealing or using drugs, even without the owner’s knowledge. And confiscation of automobiles has been used as the penalty for other offenses, such as driving under the influence. In other words, drive drunk, lose your car. That may be justice, but what happens to the money?

Property has often been confiscated and sold, even though the owner was not involved in any way. He or she didn’t even have to be accused or charged with a crime. The police have been able to go to court and, without a trial, obtain a court order to confiscate and sell the property of someone who was suspected of a drug crime. The mere fact that the property was involved in some way has been sufficient.

The theory that makes forfeiture possible is based on “a technicality in the law that allows the government to claim that it is suing only the item of property, not the property’s owner.”

Amazing.

Forfeiture laws are not new. They date back to the British monarchs, who had the power to seize the property of their subjects.

From 1991 to 1995, federal confiscation of property under the forfeiture laws increased 1,500 percent, adding up to $644 million, and seizure of property by state and local governments also amounted to hundreds of millions of dollars.

Even more alarming, the late Rep. Henry Hyde, R-Ill., “noted in June 1993 that 80 percent of the people whose property (was) seized by the federal government under drug laws (were) never formally charged with any crime.” Research literature on the subject is replete with examples of U.S. citizens whose property has been confiscated and sold by law enforcement officials at every level of government — federal, state and local — often without having been convicted of any crime.

So what happens to the money? The answer: It is divided between the federal agents and local police who are involved in these cases. What can they do with it? Just about anything they like, from buying new cars or equipment to paying bonuses to those involved — all without any public accounting. In one outrageous instance, the sheriff of Nueces County, Texas, used funds derived from a federal drug forfeiture to pay himself a retroactive salary increase of $48,000 just before he retired.

But the amount of money that is generated by forfeiture laws is only a small part of the total received by government from fines and penalties, ranging from the lowly citation for illegal parking to major penalties imposed by agencies such as the Securities and Exchange Commission, the FCC, etc. For example, in 2004, Time Warner agreed to a settlement with the SEC that included a $750 million fine. And last year, international accounting firm KPMG agreed to pay a $456 million fine to the SEC in a case that involved tax shelter investments.

When the SEC takes in a $450 million or $500 million fine, the money disappears into the black hole of government accounting, and no one ever seems to ask what happened to it.

The explanation is usually that these fines are levied to recover the costs of investigation and enforcement incurred by the agency involved. However, funding of government agencies does not appear to be reduced by the fines and penalties it collects in excess of those amounts that are forecast in their budgets. If that’s the case and the investigating agency recovers more than the amount of estimated revenue from this source, why isn’t the budgeted funding reduced accordingly?

If you think about it, fines and penalties are actually another form of stealth taxation: First the public is taxed to fund the operation of an agency, law enforcement, regulatory, etc. Then, when revenue from fines exceeds budgeted amounts, instead of applying it to the budget, the money is used for some other purpose. At the very least, the public pays the cost again by virtue of the fines that are not applied to reduce the funding of the agencies involved by a like amount.

Another interesting fact is that fines are not tax deductible. When violators, corporate or individual, pay their income taxes, in effect they pay additional taxes on the amount of the penalty that has been imposed. Because it is not deductible, a large corporate fine of, say, $450 million, means the entity that has been fined must include that $450 million in determining its profit and pay income tax on the resulting total. Thus, a $450 million fine could add up to something on the order of $600 million ($450 million plus $150 million tax).

Again, the taxpaying public realizes no tax benefit from the added revenue the government receives from such sources. It’s simple business management logic: If a “profit” (excess revenue) is realized by a government agency, shouldn’t that money be used to reduce the funding required to run it?

Nice work if you can get it.

— Harris R. Sherline is a retired CPA and former chairman and CEO of Santa Ynez Valley Hospital who as lived in Santa Barbara County for more than 30 years. He stays active writing opinion columns and his blog, Opinionfest.com.

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