The federal government is losing roughly $700 billion a year in taxes that are legally owed but never paid. The IRS knows this because it measures the problem — calculates it, studies it, and uses that data to recover tens of billions in uncollected revenue. Most state governments don't do any of that. And right now, as legislatures across the country wrestle with whether to raise taxes or slash services, that omission looks increasingly costly.
The concept of a "tax gap" — the difference between what taxpayers owe and what they actually pay — has been a federal policy tool for decades. At the state level, it's largely an afterthought. That disconnect is finally drawing scrutiny, thanks in part to new research from the Pew Charitable Trusts that asks a pointed question: why aren't states doing what the IRS has long shown works?
What Is a Tax Gap, and Why Does It Matter?
A tax gap isn't about fraud, exactly — though fraud is part of it. It's a broader accounting of all the money the government is legally entitled to collect but doesn't. That includes honest mistakes, underreporting of income, unpaid self-employment taxes, and yes, deliberate evasion. The IRS breaks its gap into three categories: nonfiling (people who don't file returns at all), underreporting (people who file but report less than they owe), and underpayment (people who file correctly but don't pay on time or in full).
In 2022, the IRS calculated that the federal tax gap neared $700 billion — a staggering figure that represents roughly 15% of total federal tax liability. Put another way, for every $8 taxpayers owed the federal government, they paid only $7. That missing dollar, multiplied across the entire economy, adds up to a gap that dwarfs most federal discretionary spending programs.
The IRS doesn't just measure the gap and shrug. Having a number gives the agency something to target. After measuring the gap and deploying enforcement resources accordingly, the IRS was able to recover approximately $90 billion — real money that would otherwise have gone uncollected. That's not a complete solution, but it demonstrates the basic logic: measurement enables action.
The State-Level Blind Spot
Here's where the story gets uncomfortable for state governments. Despite the federal model showing clear returns on investment from gap measurement, most states have never seriously tried to calculate what they're missing. According to research from the Pew Charitable Trusts, this isn't because states have solved the compliance problem — it's because they haven't looked.
The reasons states cite are real, if not entirely convincing. Measuring a tax gap is methodologically complex and expensive. States don't have access to all the same third-party data the IRS uses. Administrative capacity varies wildly. And politically, there's little appetite to commission a study that might produce an embarrassing number without a clear plan to act on it.
But the counterargument is hard to dismiss: if you don't know what you're missing, you can't make a rational decision about whether recovering it is worth the investment. Josh Goodman, a senior officer at the Pew Charitable Trusts, has made this case directly, arguing that measuring state tax gaps could be fiscally worthwhile — particularly at a moment when states are searching for revenue that doesn't require new taxes or program cuts.
The Fiscal Pressure Driving This Conversation
Timing matters here. The renewed interest in state tax gaps isn't happening in a vacuum — it's happening at a moment when state budgets are under serious strain. Federal pandemic-era aid has largely run out. Medicaid costs are rising. Infrastructure needs are growing. And in a number of states, politically toxic options like income tax increases or cuts to education and health services are back on the table.
Against that backdrop, the idea of recovering revenue that's already legally owed — without raising rates, without creating new taxes, without cutting anything — has obvious appeal. It reframes the problem: instead of asking "who pays more?" or "what do we cut?", it asks "are we collecting what we're already owed?"
That's a different kind of conversation, and in some ways an easier one. Enforcing existing tax law doesn't require the same legislative coalition-building as a rate increase. It doesn't generate the same constituent backlash as benefit cuts. And it has a logical endpoint — you're not trying to collect infinite revenue, just close the compliance gap.
This fiscal reality is also playing out in debates over health coverage. States like Colorado are fighting to preserve ACA subsidies through legislation like SB 178, partly because the federal safety net is uncertain — making state revenue collection more critical than ever.
What We Know About State Tax Gaps (and What We Don't)
The honest answer is: not much, because most states haven't tried to find out. A handful of states have conducted partial estimates over the years — usually focused on specific tax types like sales tax or income tax — but comprehensive, methodologically rigorous gap analyses at the state level are rare.
What researchers can do is extrapolate. If the federal income tax compliance rate is around 85%, and state income taxes operate on similar self-reporting mechanisms with similar enforcement capacity, it's reasonable to assume state compliance rates are at least as poor — and possibly worse, given that states generally have fewer enforcement resources than the IRS.
For a state collecting $20 billion in income tax annually, a 15% noncompliance rate would imply a gap of roughly $3 billion. That's a significant number — enough to fund substantial investments in education, infrastructure, or health services without touching tax rates. Multiply that logic across 50 states and the aggregate numbers become striking.
The Pew Charitable Trusts has been pushing states to at least attempt the calculation. Goodman's argument isn't that every state will find the same gap, or that every gap can be fully closed — it's that without the data, states are flying blind when making fiscal decisions.
Why the IRS Model Works (and Its Limits)
The federal government's approach to the tax gap is worth understanding in some detail, because it's the closest thing to a proven playbook for this kind of problem.
The IRS produces a tax gap estimate roughly every three to four years, using a combination of audit data, statistical sampling, and third-party information reporting. The methodology is expensive and imperfect, but it produces a number that's defensible enough to drive policy. That number then informs decisions about where to focus enforcement — which industries, which income types, which filing behaviors are most likely to generate noncompliance.
The $90 billion recovery figure is the clearest evidence that measurement pays off. It doesn't mean the IRS closed 13% of the gap — much of the gap is structurally difficult to collect, particularly from self-employed individuals and small businesses where income isn't subject to third-party reporting. But the measurement gave the agency a target, and the enforcement investment generated returns that exceeded costs.
States face genuine obstacles that the IRS doesn't. They lack access to some federal data that would help with gap calculations. Their tax bases are different — heavy reliance on sales tax creates different compliance challenges than income tax. And their administrative capacity is, in most cases, substantially smaller than the federal government's.
But "harder than what the IRS does" isn't the same as "not worth doing." The question is whether the marginal cost of better measurement is justified by the marginal revenue that enforcement can recover.
Analysis: What This Actually Means for State Budgets
The Pew research lands at a pivotal moment, and the implications extend beyond the immediate fiscal math. The fundamental problem with state budget debates is that they're usually framed as zero-sum: someone wins and someone loses, either through higher taxes or reduced services. The tax gap framing offers a third option, but it's not without its own political complications.
Measuring the gap creates accountability. Once a state publishes an estimate of what's being missed, it's harder to ignore. That's part of why there's political resistance to doing the measurement in the first place — it creates pressure to act, and acting means investing in enforcement capacity, which means hiring auditors and tax collectors, which is never a popular line item.
There's also an equity dimension that often goes underreported. Tax noncompliance isn't evenly distributed. Higher-income individuals and businesses — particularly those with complex financial arrangements, offshore accounts, or income from sources without automatic third-party reporting — account for a disproportionate share of the tax gap. W-2 employees, by contrast, have nearly 100% compliance because their employers report their income automatically.
This means closing the tax gap isn't just a revenue story — it's a fairness story. People who follow the rules are, in effect, subsidizing those who don't. Better enforcement levels the playing field, which has implications beyond the budget spreadsheet. In the context of broader economic pressures — including shifting investment patterns driven by AI and technology sectors — ensuring the tax base keeps pace with economic growth becomes even more critical.
The practical obstacle remains capacity. States that have cut their revenue departments over the years are poorly positioned to suddenly ramp up enforcement. But that's an argument for phased investment, not inaction. The IRS's experience suggests that every dollar invested in tax enforcement generates several dollars in recovered revenue — a return on investment that would be hard to match with almost any other budget allocation.
What Would It Take for States to Act?
The Pew Charitable Trusts research is advocacy as much as analysis — Goodman and his colleagues are making an affirmative case for states to do something. What would "doing something" actually look like?
At minimum, it would mean commissioning a credible gap estimate. That doesn't require building the IRS's analytical capacity overnight — it might mean contracting with academic researchers or tax policy organizations to produce a defensible ballpark figure. Several states have done partial versions of this; the question is whether the political will exists to do it comprehensively.
Beyond measurement, closing the gap requires enforcement investment. That means more auditors, better data analytics to identify noncompliance patterns, and potentially improved information-sharing with the IRS. The federal government has occasionally pushed to expand state access to federal tax data, with mixed results — privacy concerns and administrative complexity have slowed progress.
There's also the question of taxpayer education and system design. Some portion of the tax gap reflects genuine confusion rather than intentional evasion. Simplifying tax systems, improving notices, and making it easier to comply correctly can reduce noncompliance without enforcement at all.
Frequently Asked Questions
What exactly is a "tax gap"?
A tax gap is the difference between what taxpayers legally owe and what they actually pay on time. It includes three components: people who don't file returns at all, people who underreport their income or deductions, and people who file correctly but don't pay. The federal tax gap was nearly $700 billion in 2022, according to the IRS.
Why can't the IRS just close the entire gap?
Closing the entire gap would require essentially perfect enforcement, which isn't practically achievable. A significant portion of the gap comes from sources where income isn't reported by third parties — self-employment income, cash transactions, complex business arrangements — making it structurally difficult to identify noncompliance without expensive audits. The IRS focuses on the most cost-effective enforcement targets and recovers roughly $90 billion annually through those efforts.
Do states collect different taxes than the federal government?
Yes. The federal government relies primarily on income taxes, payroll taxes, and corporate taxes. States have more varied tax structures — some rely heavily on income taxes, others on sales taxes, some have no income tax at all. This means the composition of a state tax gap would look different from the federal gap, and the enforcement strategies would need to be tailored accordingly.
Is measuring the tax gap expensive?
It can be. The IRS spends significant resources on its gap estimation process, which involves statistical sampling of audits and complex data analysis. For states with smaller administrative budgets, this is a real obstacle. However, Pew researchers argue that even imperfect estimates are better than none, and that phased or partial approaches — focusing on specific tax types or income categories — can produce actionable data at lower cost.
What states have already tried to measure their tax gaps?
A small number of states have produced partial or full tax gap estimates, though comprehensive analyses are rare. The lack of systematic tracking makes it difficult to compile a complete list, which is itself part of the problem Pew is highlighting. States that have attempted estimates tend to focus on specific high-noncompliance areas like use tax (the sales tax owed on out-of-state purchases) rather than the full tax picture.
The Bottom Line
The conversation about state tax gaps is ultimately a conversation about governance — about whether governments are willing to do the hard work of understanding their own fiscal situations before asking citizens to pay more or receive less. The IRS has demonstrated for decades that measurement and enforcement pay off. The federal tax gap nearing $700 billion is a problem, but the fact that the agency recovered $90 billion after measuring it is a success story worth replicating.
States facing difficult fiscal choices have a legitimate alternative to explore before reaching for tax increases or service cuts: find out what's already owed, and collect it. That requires political courage to commission the measurement, administrative investment to act on the findings, and the willingness to prioritize enforcement of existing law over easier political choices.
The Pew Charitable Trusts' research highlighted by Marketplace isn't presenting a magic solution — closing tax gaps is hard, expensive, and takes time. But it's presenting a question that state legislators should have to answer: why are you asking residents to pay more or accept less without first finding out whether you're collecting what they already owe?
The answer to that question will say a lot about how seriously states take the basic obligations of fiscal management.
