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Sunday, July 25, 2021

California Lawmakers Miss Opportunity to Help Low-income Parents

3 cartoon figures demonstrating speak no evil, see no evil, hear no evil

Despite better ideas on how to truly help low-income parents of infants, California lawmakers took a route this July that spends a lot of money but doesn't sufficiently help the group in need of assistance. Why does this happen? There is plenty of data and a 2019 report from the Legislative Analysts Office pointing out that their law change won't provide as much help as it could have if better designed.

I'm talking about what started out in 2019 (SB 92, Chapter 34 (6/27/19)) as a two-year exemption (2020 and 2021) from sales tax for infant diapers and menstrual products. The state was required to transfer the lost revenue to local governments. SB 92 also required application of the accountability provision at Revenue & Taxation Code section 41 for the LAO to measure the effectiveness of the exemption in meeting the stated goal of promoting public health by increasing the affordability of and expanding access to diapers.

Prior to its expiration and before the LAO could complete its analysis, lawmakers extended the exemptions until July 1, 2023 and extended the due date for the LAO report to 7/1/22. (AB 85 (Chapter 8, 6/29/20)). Now, with AB 150 (Chapter 82 (7/16/21)), lawmakers have made the diaper and menstrual product exemptions permanent and cancelled the LAO report on the effectiveness of these exemptions.

I wrote about the weaknesses of the infant diaper sales tax exemption in 2019 (8/3/19 post), but repeat the highlights due to this recent example of missed opportunity to really help individuals in need which would end up benefitting us all via healthier babies, greater funds for low-income individuals, and less missed work.

While it may sound good to say you are helping public health and helping to make infant diapers more affordable, we need to ask more questions and apply critical thinking. In my earlier post, I noted that diapers cost between 11 cents per diaper up to 49 cents per diaper. Likely, the more expensive diapers are purchased by parents with more funds who don't need the sales tax savings (roughly 9 - 10% of the purchase price) and likely don't even notice the savings.* 

How much does this cost the state in lost revenue? Per the 2021-2021 tax expenditure report of the California Dept. of Finance, $76 million per year!

Prior to original enactment of the diaper exemption, the LAO told lawmakers that if they really wanted to help low-income families, providing greater subsidies to child care would be better. Per this 2019 report:

"the state can expand a program that addresses one of the biggest expenses parents face: child care. The state funds various types of subsidized child care for low-income families, but the number of eligible children typically exceeds the number of “slots” funded by the state. Due to this shortfall, the state fails to assist part of the targeted population and creates an inequity between those who receive slots and those who do not."

So, why isn't the $72 million per year used to really help low-income parents of infants? 

I think it is because we aren't asking enough questions such as: 

Which income group of parents gets the biggest savings from this tax break? It is the higher income taxpayers who spend more money on diapers and don't need the assistance (wasted spending).* Why are we subsidizing folks who don't need a subsidy?

Will reducing the cost of diapers by the 9 to 10.5 cents of sales tax per dollar help low-income individuals? Of course it offers some assistance, but we still have diaper banks in California and many struggle to pay the sticker price, not just the sales tax. 

What would provide better, more targeted help? Use the $72 million to help those who need it rather than those who do not. Provide diapers to child care centers who serve low-income workers.  I read a report last year on diaper banks for a Tax Notes State article on the need to fix the sales tax base. I learned that some parents get turned away from the child care center if they did not bring diapers for their child so then have to miss work to stay home with the child. Why not use $72 million to prevent this?

Why make the exemption permanent before its expiration date and before getting the analysis from the LAO on the effectiveness of the exemption?  Again, we all need to demand greater accountability from lawmakers regarding spending.

*I recently learned from reading an excellent book that I highly recommend reading (and hope all lawmakers read it) - Broke in America: Seeing, Understanding, and Ending US Poverty (2021), that some low-income individuals do end up spending more on diapers than would be charged if buying them in bulk from a big box retailer because they might not live near such a retailer and/or they don't have a lot of funds at once so buy the smaller package where the cost per diaper is higher.  Again, this calls out for doing better with taxpayer dollars than occurs with the now permanent California sales tax exemption on infant diapers.

What do you think?



Thursday, July 15, 2021

Tax and Biden's Build Back Better - What's Included and What is Missing?

picture of table posted to web

The tax provisions included in President Biden's Build Back Better plan are mostly similar to what he campaigned on, such as repealing tax preferences for fossil fuels and providing tax breaks for most families. 

I have posted a table listing the tax provisions in the Administration's FY2022 Greenbook. There is a lot there relevant to all individuals, wealthy people with lots of appreciated assets, alternative energy companies, oil companies,and more.

I think it is also interesting what is not there such as:

  • Limiting the QBI Section 199A deduction for individuals with income above $400,000.  I guess this is because 199A automatically goes away after 2025 so why waste political capital trying to reduce it for less than 1% of individuals.
  • Capping the benefit of itemized deductions at 28%.
  • No change to the estate tax exemption or tax rate. Again, this is likely because we automatically revert to the lower exemption and higher rate after 2025 (one of a few built-in tax increases in the Tax Cuts and Jobs Act, the temporary 199A).
  • Fixing Section 174 so we don't start using the TCJA provision after 2021 that R&D must be capitalized and amortized rather than expensed. Expensing has been in the law since 1954. While the BBB plan mentions helping R&D, there isn't anything specific to fix the TCJA change.
  • Reducing the over 100 special rules that don't need to be in the law such as the mortgage interest deduction, various education provisions, the exclusions for employer-provided health insurance, and more. These provisions are called tax expenditures and result in reduced revenues of about $1.8 trillion per year. Now would be a good time to phase out the mortgage interest deduction because only about 11% of individuals itemize deductions today and not all of them have a mortgage. This subsidy for higher income individuals doesn't belong in the tax system. If there is desire to use the tax law to help individuals purchase a home, a first-time homebuyer credit would be better. (more on this another time)
  • An increase to the gasoline excise tax that has been at 18.4 cents/gallon since 1993.  Of course, this would represent a tax increase on individuals with income below $400,000, but with the outdated figure and a desire to reduce greenhouse gas emissions, seems like an oversight (and a reason why the campaign promise of no tax increases for those with income under $400,000 should have had some caveats).  And no mention of initiating efforts to shift from the gasoline excise tax to a vehicles miles travelled tax so that all vehicles contribute to the Highway Trust Fund rather than only gas-powered vehicles.
  • Numerous simplifications and improvements. I started listing some of these in a recent blog post and will continue to and hope readers will add in their ideas in the blog comments.
What do you think?

Friday, July 9, 2021

How Do We Handle the Future of Taxes and Data - TCAST podcast


I recently had the opportunity to be a guest on
TARTLE's podcast - TCAST. The topic tied to an op ed I had in The Hill in April - Let's say 'goodbye' to the April 15 due date.

The podcast and other interesting data related ones from TCAST can be found at:

Apple: https://apple.co/2TT8C1t
Spotify: 
https://spoti.fi/3ht4FcK 
YouTube: 
  https://bit.ly/3xspMBB

Thanks to Alexander and Jason for the invitation and hosting this topic about modernizing our tax system and improving transparency of the system. I hope you'll listen in - and check out TCAST's other podcasts.

What do you think?

Friday, July 2, 2021

Tax Coverage for Future CPA Exam - CPA Evolution

I had the honor and privilege to participate with practitioners, tax faculty and AICPA exam staff recently to work on a model curriculum that ties to the next version of the CPA exam, referred to as CPA Evolution. The purpose of the revision is to better reflect how CPAs operate in today's global, digital environment where accounting, audit, tax compliance and planning, and technology are all important.

The exam will have a core that everyone takes with a foundation of accounting, audit, tax, business law, ethics and technology. Then prospective CPAs take one of three discipline exams: 

  • Tax compliance and planning
  • Information systems and controls
  • Business analysis and reporting

This exam is expected to launch in 2024.

In the meantime, many accounting and tax faculty asked the AICPA and NASBA how they might need to modify accounting curriculum to best help students be ready for this exam. Now, accounting undergraduate coursework has never been intended to be a CPA exam prep course, but it should provide a strong foundation for further prep for those accounting majors who want to become a CPA. Also, AICPA and NASBA studied today's practice of accounting and tax and found some gaps which should be of interest to all accounting programs and likely most were already working on closing these gaps such as by helping students learn how to find and utilize digital data, use data analytics software, think like a business person (business acumen) and think about tax planning rather than only compliance.

What are some of the key changes for a future CPA taking the Tax Compliance and Planning (TCP) discipline exam?  A few:

  • Greater focus on business and personal tax planning
  • Use of the term "tax attributes" rather than just covering them without naming them (a minor change, but I think relevant to a better focus on tax in the real world)
  • More on tax-exempt orgs and trusts than currently covered
  • More real world understanding of tax credits including how to claim them (in general terms), deadlines, clawbacks and expiration dates.
  • Greater focus on the intersection of tech and tax including understanding the Gramm-Leach-Bliley Safeguards rule

In deciding the depth and range of tax learning objectives, we considered what we thought a person 2 to 3 years out of school should know.

I encourage you to look at the updated suggested learning objectives for both tax in the core exam and the TCP discipline exam.  Some might be surprised at some of the topics, but most of these are already in the blueprints for the current CPA exam!

Links of interest:

Background info and links

FAQs on the CPA Evolution Model Curriculum

Model Curriculum - Tax Core on pages 42-51 and TCP on pages 73-88

What do you think?





Monday, June 21, 2021

Necessary But Overlooked Tax Changes We Need

toolbox; inside says needed tax reforms

I've been maintaining a list for several years of overlooked improvements I think are needed for our federal tax system. I keep adding to the list including based on oddities found in current court cases.  For the next few weeks, I'll post most of these suggestions. I hope you'll comment on them and add some of your own. It would be terrific to see these included in any tax reform legislation of the 117th Congress and Biden Administration.

  1. Create a de minimus rule for personal use of virtual currency similar to §988(e) for foreign currency which excludes personal gains under $200. This is needed for simplicity. It should exclude bitcoin acquired after a certain date though due to the tremendous gains that exist with very low basis bitcoin (too much of a windfall rather than only simplification).

  2. Repeal the §280A(g) exclusion when one's home is rented out for under 15 days (there is no purpose for this exclusion that mostly benefits high income individuals who own a home to rent for a high rental amount).

  3. Replace §280A rental limitations with §469 limitations. There is no need to have two different rental expense limitations and the §469 one is easier and has more guidance.

  4. Fix §6050P and regs (and perhaps consumer protection laws) to be sure a Form 1099-C is only issued if the debt is truly cancelled. A recent example of this issue is Gericke v. Truist, No. 20-3053 (DC NJ 3/26/21). This is a problem for the fisc and for borrowers. For example, in Stewart, TC Summary Opinion 2012-46, the borrower received a 1099-C in 2008 and did not report it. The court found that the debt was discharged in 1999 “when it was clear that the debt would not be repaid.” So it was too late to pick up the income. There are several cases involving mismatch of receipt of 1099-C and discharge of debt.  See my 5/10/21 blog post.

  5. Fix §6050I to apply to governmental entities and units too. PLR 202118003 (5/7/21) held that a state liquor store was excluded from having to file Form 8300 as it was not a “person” for purposes of this Code section.

More later...

What do you think?