There is a limit to what people will accept:
As California grapples with a record $34.6 billion budget shortfall, the underground economy is thriving -- costing the state up to $4 billion a year in unpaid taxes, according to the Franchise Tax Board.
But independent studies suggest the state's estimate is low, and that even more individuals and businesses are dealing in cash to avoid taxes.
Private economists also question the state's ability to rein in the underground economy at a time when policy-makers are considering big cuts in services and tax increases.
A decade ago, when California was facing its last fiscal crisis, the state created a task force to crack down on off-the-books transactions. But by all accounts, the underground economy -- which includes everything from the sale of legitimate goods and services to illegal activities such as gambling -- has continued to grow.
Because cash is usually untraceable, estimates of the size of the state's underground economy vary.
The state Employment Development Department, using a 1998 federal Internal Revenue Service study, pegs it at $60 billion to $140 billion a year.
But that estimate has not changed much since the recession of the early 1990s, when hundreds of thousands of immigrants willing to work for low wages flooded Los Angeles County and other areas of the state. Many were undocumented, and labor officials say shady businesses seeking an edge in the competitive marketplace often paid them under the table to avoid taxes.
A study released last year by the Economic Roundtable, a Los Angeles public research organization, estimates that 9 percent to 29 percent of Los Angeles County's work force is now paid in cash.
"Using the midrange figure of 15 percent, we believe $1.1 billion in payroll taxes alone aren't being paid" in Los Angeles County, said Daniel Flaming, a co-author of the study that compared federal census data with state employment records.
Flaming concedes the cash economy is considerably smaller in Northern California. But Los Angeles County accounts for nearly a third of the state's population. Flaming said cash is also widely used to pay undocumented farm workers in the state's agricultural areas.
As a result, he estimates the state could be losing a total of $3.3 billion in payroll taxes each year. That doesn't factor in income, Social Security, workers' compensation and other taxes that pay for programs to protect workers who become ill, injured or unemployed or who retire.
Economists say independent contractors -- from people who work in their homes to manufacturers -- make up a large share of the underground economy.
While the percentage of people employed in this so-called informal economy fell in the United States during the past decade, it grew in the Los Angeles region from 9 percent in 1989 to 14 percent in 2002, according to a recent UCLA Anderson Forecast.
Most independent contractors are paid by conventional methods, but labor experts say many are paid in cash.
Ted Gibson, former chief economist for the state, said taxing agencies are limited in cracking down on the underground economy.
"I'm not sure that government is capable of swooping in and, A, identifying who's paying in cash and, B, collecting taxes," he said. "If something egregious pops up, then it gets the interest of government."
Patrick Hill, a spokesman for the tax board, said the agency prosecutes about 300 cases a year and settles many others before they come to trial. One case involved Reginald Smart, the owner of an Oroville public scales firm. Smart pleaded no-contest in September to failing to report income of more than $1.4 million over a three-year period.
Jack Kyser, chief economist for the Los Angeles County Economic Development Corp., said the problem is compounded because so many immigrants come from countries where distrust of the government is high.
The IRS and the Franchise Tax Board have aggressive education programs on payroll laws to augment criminal investigation efforts. But Kyser said studies have found that untaxed sales in Los Angeles County from street vendors alone total about $250 million a year.
"We have a new economy that's evolving, and government tends to go by the book," Kyser said. "This is a very complicated issue, and it's going to take a huge change in attitude on the part of government to deal with this problem."
California has three taxing agencies: the Franchise Tax Board, which monitors personal income tax; the Employment Development Department, which collects employer taxes; and the Board of Equalization, which collects sales taxes.
Together, they assign 2,200 employees to enforce compliance by the state's 1 million employers and 14 million tax filers. The tax board also sorts through more than 220 million income records each year from various agencies, including the Internal Revenue Service, and matches them against tax return records.
In 1993, when the state was facing its last fiscal crisis, then-Gov. Pete Wilson created a task force to crack down on the scofflaw employers. Since then, its investigations have resulted in assessments totaling more than $130 million in unpaid employment taxes plus penalty and interest charges.
Experts say the downturn in the economy has pushed many displaced workers into the underground economy. Gov. Gray Davis recently consolidated some of the bureaucracies that administer the state's job training and labor enforcement programs under the Labor and Workforce Development Department.
Administration officials predict the new agency will clamp down on the underground economy through greater efficiency. But the reorganization did not boost the number of enforcement officers, which union officials have been seeking for years, or include the Franchise Tax Board.
"We'd like to see enforcement beefed up," said Tom Rankin, president of the California Labor Federation. "This is a problem that is getting worse with no end in sight."
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