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Sunday, July 22, 2012

Government disclosuse of taxpayer data and the meaning of transparency and accountability

Despite the timing of this post, it is not about whether Governor Romney should disclose more than one year's tax return to the public. Instead it is about a California legislative proposal (AB 2439) for the government, namely the Franchise Tax Board (FTB), to disclose for the 1,500 largest corporations that file Form 10-K with the SEC, the "name and tax liability of each taxpayer and whether the taxpayer made an election to apportion its income in accordance with Section 25128.5" (25128.5 is the election to apportion income to California using the single sales factor method).

Privacy of a taxpayer's tax data is probably viewed by most people as immutable. Internal Revenue Code Section 6103 provides that "Returns and return information shall be confidential" and no employee or officer of the government is to disclose such information. Return preparers who improperly disclose or use taxpayer information can be subject to civil (IRC Section 6713) or criminal penalties (IRC Section 7216).

Tax data includes a variety of confidential financial and for individual returns, personal data. It tells the tax agency the information they need to know.  It is useful for gathering and reporting of data by the tax agency in the aggregate, but by itself, it is likely not very helpful to others and perhaps even confusing and misleading.

The purpose of AB 2439 is to help "provide transparency and accountability in the corporation tax system."   While transparency and accountability are important principles of good tax policy, they do not mean that any taxpayer's tax data should be disclosed by the government. Instead, these principles mean that taxpayers should be able to understand their tax liabilities and the rules. It also means that there are clear and appropriate reasons for the rules and design of the tax system. It would mean that if lawmakers add an incentive to a tax system, for example, that there was data showing a need for the incentive and it is narrowly and effectively designed to meet the need. Data should be collected to assess whether it is working as intended.

If the goal is to measure whether the single sales factor (SSF) apportionment incentive is effective, knowing whether the largest 1,500 companies elected to use it and how much tax they paid to California won't tell us anything helpful. The purpose of SSF apportionment is to encourage companies to locate payroll and property in California because doing so will not increase their California tax. Thus, SSF is an economic development incentive.

The accountability data that is needed is mostly available to the FTB. It includes:
  • The number of companies that elect SSF each year. They can group this data by revenue size, taxable income size, SSF apportionment factor size, and industry type.
  • The number of companies that do not stay on the SSF each year (that might indicate that the incentive is not long lasting).
Additional data that would be helpful to assess whether the SSF election leads companies to locate more payroll and property in the state would be to add these lines to the tax return:
  • Number of employees (full-time equivalent) based in California and elsewhere.
  • Amount of property acquisitions (real and personal) in California for the year and the data on dispositions of California property.
The FTB could use that data along with other economic development data available from other government agencies to help lawmakers determine if SSF is helping economic development in the state.

The accountability question should be asked while the legislation in under consideration so it can be included in the final bill. The data should be collected and reported without taxpayer names attached. There seems to be no accountability reason for disclosing to the public the names and tax data of particular taxpayers.

I have some additional suggestions for improving accountability and transparency of California's tax system here (from testimony delivered in February 2012).

What do you think?


Anonymous said...

Here's an elegant alternative proposal to the patchwork fixes proposed for our broken, corrupt system of taxes:

Fair Share Tax (google it)
~1. Federal Income Tax: All household income & compensation is taxed at a 20% rate; except the following which are taxed at a 3% rate: a)Income under a realistic poverty line (eg$30,000 for a family of three); b)Expenses & compensation for medical expenses exceeding 6% of income; c)Income placed into or spent from tax-free education-retirement accounts. No other adjustments, deductions, or exemptions! Effective rates (family of 3): $20,000-3%; $65,000- 10%; $140,000-15%; $20mill+-20%.
~2. Federal Net-Worth Tax: All household accumulated wealth, except the first ~$800,000 (essentially median home price and tax-free account value) is taxed at 2% rate. This tax is paid once a year and replaces current property, capital gains, and estate taxes.
~3. State and local governments funded entirely with combined ~50% surcharge on Federal tax. End sales, property, estate, Social Security taxes.
~4. 30% cut to military but we're still spending 3.5 times that of next most militarized country. Substantial cost savings on medical care, like that practiced at Mayo Clinic

~Returns federal taxes revenue to that of Clinton era (% of GDP)
~$2 in spending cuts for every $1 in revenue increases
~1-page Tax Returns
~Federal surpluses within 10yrs
~Large tax savings for working-poor and middle class
~Increased education, research, infrastructure spending
~Reduced tax incentive for market-bubbles
~Last 3 produce stable, strong economic growth and prosperity for all

Naila said...

California, as it is, is losing its popularity among large and mid-size companies due to high overall taxes and substantial regulation. This new bill, if passed, will cause a significant turmoil and bring no benefit.

I completely agree that useful data can be gathered without disclosing taxpayers' names to the public.