Buried Treasure New report digs into underground economy

By Tom Kirvan

Legal News

It's big business.

A nearly trillion-dollar business that touches every corner of the country, dwarfing annual revenue figures of Fortune 500 companies.

In Michigan alone, it hums to the tune of untold billions annually, money that could flood state treasury coffers with tax dollars that would go a long way toward solving chronic budget woes.

But this business isn't taxed. Its very existence is built on the premise of avoiding that governmental habit.

A new report released this week by the Underground Economy Task force says Michigan is losing out on taxes and child support payments because of the underground economy.

The report recommended that courts take action to adjust child support payments to avoid driving some parents to work off the books because they can't afford their current or back payments.

It also says the state should make doing business underground more difficult and costly.

Michigan Supreme Court Justice Maura Corrigan is one of a dozen task force members. She says Michigan is hoping to start a national dialogue on how to get at the lost taxes and child support.

She says Michigan loses $5 billion to $7 billion annually because of unpaid or underpaid taxes.

Corrigan got her first real glimpse of the size of this business several years ago when she was considering an appeal of an armed robbery conviction. The defendant, a construction worker for a contractor based in The Thumb, had been convicted of stealing some $300,000 in cash from his boss's safe. It was a handsome payday for the defendant, who along with his construction colleagues was accustomed to receiving his weekly wages in crisp currency.

"The case took care of the armed robber who used the gun to commit his crime, but there was no sense that anything was done to prosecute the owner of the company for paying his employees in cash, thereby avoiding state and federal taxes," said Corrigan. "That case really piqued my interest on a problem that I figured had to be of epic proportions."

It revolves around the so-called "Underground Economy," a label attached to a tax-skirting monster that government officials at all levels can't quite get their hands around.

"We know the problem is big, but I'm not really sure that we really know just how widespread it is," Corrigan said. "It has many tentacles."

The former Chief Justice of the state Supreme Court got a firsthand look at its spread as the chair of the Michigan Underground Economy Task Force, a blue ribbon panel that was formed in June 2008 to chart the path of the multi-faceted menace.

When they speak of the "underground economy," officials refer to "persons who earn wages or sell products secretly through unreported" cash transactions.

"Thus, they conceal their income from the IRS, from state tax authorities, and from courts and agencies that collect child support," said Corrigan, who for the past 8 years has overseen the administration of child support in the state court system on behalf of the Supreme Court.

"As the percentage of single parents increases in this nation, our collection problem is growing," Corrigan said. "Although the underground economy by its very nature is difficult to measure, the federal government has gained a fairly accurate picture through the IRS and other measures of income calculation by the United States Department of Commerce. In March 2008, in a national meeting, the IRS estimated that the participants in our underground economy deprive our nation of $345 billion in unpaid federal taxes each year."

The money that stays out of the reach of the taxman also is putting a severe crimp in court-ordered child support payments, she indicated.

"Consider that in 2008 our state collected $1.45 billion in child support," she related. "We have a statewide arrearage of more than $9 billion. Even if we attribute 70 percent of that arrearage to parents who can't afford to pay what they owe, we still are left with almost $3 billion of uncollected child support that is owed by parents with an ability to pay - many of whom are earning income under the table."

The task force focused its work on three areas -- prevention, collaboration, and enforcement. The first is aimed at "trying to prevent non-custodial parents from fleeing into the underground economy in the first place," according to Corrigan. The second, collaboration, is focused on breaking down barriers to inter-governmental cooperation; while the third, enforcement, is geared toward identifying those "techniques that will successfully collect from those who make their living in the underground economy."

Task force officials believe that increased governmental collaboration will be critical to stemming the growth of the underground economy.

The Michigan task force, when viewed on a national scale, is going it alone, serving as a "pioneer" in efforts to address the problem, according to Corrigan. The states of California and Massachusetts were early advocates of similar studies, but decided to postpone any such undertakings, perhaps waiting to see the results of the Michigan report. Now, the spotlight is shining squarely on Michigan, hopefully for the good of the nation.

"None of our task force members believes that the underground economy will disappear with the publication of our report -- no vaccination, no cure, no magic bullet will eradicate the under-ground economy," Corrigan said. "We hope that our report will frame the debate on potential solutions to the underground economy, in our state and perhaps the entire nation."

Published: Fri, Jun 18, 2010