By Kevin Hardy, Stateline
Though states are missing out on billions in unpaid tax dollars, few have any mechanism to measure how much is being lost, according to a new report.
The so-called tax gap — the difference between the taxes legally owed to the government and the amount paid — receives scant state attention, researchers from The Pew Charitable Trusts said in a report released Tuesday. That gap includes taxpayers who should file but do not, those who underreport their income, and those who do not pay on time.
As many states confront budget shortfalls and deficits, Pew researchers said reducing these tax gaps could provide revenue needed to avoid tax increases or cuts to state services.
“Yet few states have measured their tax gaps, in part because of the complexities of doing so,” the report said.
By contrast, the federal government does regularly study the issue: The IRS projected the 2022 tax gap reached nearly $700 billion. The agency expected to eventually collect about $90 billion of that sum, leaving an outstanding gap of more than $600 billion.
Pew pointed to 2025 research by Rob Warren, a retired IRS criminal investigation special agent who is now an assistant professor of accounting and finance at Radford University in Virginia. He contacted all states with income taxes in 2020 and 2021 asking whether they had ever estimated their tax gaps. Only eight states had done so since 1992, he concluded.
“The problem is that states are ignoring their tax gaps — wholesale ignoring,” Warren told Pew.
Pew said the tax gap is difficult for states to measure, particularly with dwindling resources and tax structures that vary significantly from the federal tax code.
Still, some states are paying closer attention: a recent law in Connecticut requires the state to study its tax gap. A review of the 2022 tax year found a gap of about $3 billion. That amount could nearly cover the entire state share of Medicaid benefits, Pew said, providing safety net health insurance to more than 1 million residents.
The Pew report comes amid a time of tightening state budgets: Lawmakers in many states are trying to close short-term budget gaps, while some are facing long-term structural imbalances with costs far outpacing revenues.
At the same time, state reserve funds, crucial savings for governments, have weakened for the first time since the Great Recession.
Stateline reporter Kevin Hardy can be reached at khardy@stateline.org.
This story was originally produced by Stateline, which is part of States Newsroom, a nonprofit news network which includes Oklahoma Voice, and is supported by grants and a coalition of donors as a 501c(3) public charity.
