California AB 3289 and Greater Transparency for Our Tax Laws

California AB 3289 was enacted 7/15/24 (Chapter 124). It modifies Revenue & Taxation Section 41 which exists to improve accountability and transparency of the California tax system. Generally, any credit, deduction, exclusion, exemption of other tax benefit enacted is to state its goals, have detailed performance indicators to determine if the goal was met and call for appropriate data collection.

AB 3289 modifies this provision to exempt any new tax break that is a gross income exclusion if the lawmakers determine there is no available data to collect and report.

For example, picking a "hot" topic for summer 2024, if lawmakers added an exclusion for tips of certain employees, they would not have to include detailed performance indicators or data collection if lawmakers determine no available data can be collected and reported.

Per the Senate analysis (3/19/24) of AB 3289, the rationale for this change is that exclusions from gross income "often do not have available information to report, as the taxpayer does not list that excluded income on their return."

I don't think this change is needed. We should be able to find performance indicators for measuring if a tax break's goals and purposes are met and enable data collection for any tax change. AND, for equity, fairness, transparency and accountability purposes, we should have exclusions reported on an individual's tax return. Today, I think the only one reported is income on tax-exempt bonds. But that doesn't go a step further to highlight to the filer how much taxes they saved by using that exclusion.

Some exclusions are quite large such the exclusion for employer-provided health insurance, fringe benefits, gifts, life insurance proceeds, and gain from sale of a principal residence. The transparency problem of not reporting these items on a return is that taxpayers don't see the tax savings they obtain.

A schedule could be added to Form 1040 and modified by the states, that lists all tax breaks the taxpayer is using. Then their tax prep software can do a with and without tax calculation to show the savings from the tax breaks.

A fairness aspect of this is that for tax credits, the amount is on the return, but the tax savings of the exclusion for employer provided health insurance is not on the return. The average EITC at the federal level is $2,541 (per IRS 2022 stats) and that credit is clear on the return. Yet, many high income employees have a greater tax break just from their employer provided health insurance and that is not shown on the return. For example, someone in with a marginal tax rate of 32% where the employer covers $15,000 of their health insurance gets a tax break of $4,800 but likely is totally unaware of this.  The Affordable Care Act requires employers to report on Form W-2 the total cost of an employee's insurance and that should be changed to only report the amount the employer paid for the employee (not also any amount paid by the employee). This would provide this info right on the W-2.

Let's create a schedule of tax breaks to include with Form 1040 to create greater transparency of our tax systems. 

What do you think?

Budget Literacy for Form W-2

H.R. 8372, Debt Per Taxpayer Information Act, proposes to require the IRS to add this information to the bottom of Form W-2:

  1) Total revenue, outlays and deficit of the Federal government;

  2) Total gross Federal debt; and

  3) Estimate of the pro rate amount of Federal debt for taxpayers who will file 1040s for that year.

Sounds like a good idea to me.  There are many places where information about our tax and budget can be placed, including signs/posters in government buildings, lawmaker websites, and to better reach more individuals, rather than only the W-2, put the H.R. 8372 information on the bottom of Form 1099-NEC.

H.R. 8372 sponsor Congressman Arrington states that the Federal debt figure is $34 trillion or $200,000 per taxpayer!

In 1990, IRC Section 7523 was enacted to require the IRS to put 2 pie charts in the 1040 instruction booklet. One showing broad categories of revenues and the other expenditures. That may have reached people in the 1990s, but today, most people likely don't look at any pages of the Form 1040 instructions instead relying on tax prep software or a tax return preparer for answers to questions. That information also need to be moved to places where people will see it. [See my blog post on Section 7523 from 11/10/12]

And more is needed. I'd suggest a QR code with the proposed info to add to the W-2 so people can readily go for an explanation and more information. 

What do you think?

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?

13th Anniversary of the 21st Century Taxation Blog

I started this blog 13 years ago today to help promote ideas and discussion on how to improve tax systems by moving them into the 21st century ways of living and doing business and following principles of good tax policy.

Despite being 20 years into the 21st century, these topics are still needed as tax system modernization seems to move slowly despite advanced uses of technology in other areas. For example, consider the contact tracing apps being developed by Apple, Google and others that use tech features in smartphones to keep track of who you encounter so the app can let you know if anyone later (or presently) has the virus. Consider the increasing amount of technology developed for cars and other mobility tools to provide directions, monitor traffic conditions, and send alerts. These can also be used to allow, for example, our gasoline excise tax to be based on miles traveled rather than gallons of gas purchased so that even electric vehicle owners will pay for road maintenance and building.

Here are a few ideas I'll continue to explore this year:

1. Modernizing worker classification rules to reflect use of technology to enable people to find full-time employment, as well as part-time employment when there is a need to monitize one's time to generate needed cash. This is a good use of technology. Rules that require these workers, often working less than seven hours per week to be employees means they don't get to monitize their spare time because employers logically don't to go through lots of forms and filings to hire someone to work 5 hours per week for six or fewer months.

2. Improving accountability and transparency in our tax systems so more people will ask such questions as:
  a. Why is a deduction allowed for mortgage interest on a vacation home but not for other debt?
  b. Why can someone deduct mortgage interest on up to $750,000 of debt regardless of income level but the deduction for student loan debt is limited to $2,500 and not available once income exceeds a specified amount?
  c. Why do we spend over $200 billion annually to help employees pay for health insurance but do not spend the equivalent for other employees and self-employed individuals? Why not use these funds more equitably?  And, why is health insurance tied to employment? The reason dates back to the 1940s and today results in a lot of waste because the system harms normal supply and demand (as anyone with employer-provided health care knows because doctors only ask if you have health insurance rather than discuss prices and needs with you).

3. Better use of technology for tax compliance. Filing your taxes should be as easy as ordering from Amazon or similar company, or transferring money on a banking app or making a payment with Paypal, Venmo or similar tool.

What tax policy topics are on your mind?

Thanks for reading!

How about making April 30th Celebrating Taxpayers Day?

How about making April 30th Celebrating Taxpayers Day? 

A few things lead me to suggest this. The reasons mostly tie to my recent research and writing on improving transparency of our tax systems.*  I like all principles of good tax policy (I hope we all do). I think that two on the AICPA set of principles of good tax policy need more attention because doing so will help tax systems to better meet the other ten principles the AICPA promotes. These two principles:

• Transparency and visibility - Taxpayers should know that a tax exists and how and when it is imposed upon them and others.
• Accountability to taxpayers - Accessibility and visibility of information on tax laws and their development, modification and purpose are necessary for taxpayers.

If people better understand our tax rules and policies, they are more likely to question why, for example, a special rule exists or was introduced or enacted, why permanent or temporary, how a deduction benefits those in higher brackets more than those in lower brackets (unless there is a phase-out), marginal tax rates and relevance, and that the amount of one's refund has little to do with their total tax liability. They would ask better questions of elected officials and those running for office. They would be better aware of the taxes they and others owe. And, hopefully, compliance would improve and be something we are proud of and celebrate.

Here are three recent events that lead me to suggest starting a Celebrating Taxpayers Day.

1. IRS Commissioner Rettig issued a message on April 12 thanking taxpayers. The first two paragraphs follow:

"As the tax filing deadline approaches on April 15, I’d like to thank taxpayers for taking the time to file and pay their taxes. Our nation’s tax system is built around the concept of voluntary tax compliance, meaning citizens comply with their civic duty each year by preparing and filing their taxes – without direct government intervention.
  This principle has helped make our tax system a model for the entire world. Thanks to taxpayers, this system helps fund our great nation. Each year, 95% of the gross receipts of our country flows through the IRS – about $3.5 trillion last year – funding critical aspects of the U.S., ranging from roads and schools to the nation’s military."

Why not make this "thank you" an annual event on a specified date with an explanation of why taxpayers should be thanked, the importance of voluntary compliance, and seize an opportunity to build and support positive tax morale.

2. In my research I came across a 2015 OECD report, Building Tax Culture, Compliance and citizenship: A Global Source Book on Taxpayer Education. It lists activities of 28 developing countries for promoting tax compliance. A few of them have celebration days. For example, Rwanda has an annual Taxpayers Day celebrating compliance and helping citizens understand and appreciate how taxes and the country's development are connected. The president officiates at the event and a report on tax revenue data and tax agency challenges is released. Bangladesh holds a National Income Tax Day 15 days before the tax due date. There are street processions, workshops, conferences and tax clinics. They also show documentaries and dramas on taxation. 

   Celebrating Taxpayers Day in the U.S. could be educational and a reminder of the importance of taxes to our economy and society. It could also be a day where state and local governments help explain their taxes and budgets to their citizens, an opportunity for debates on current tax issues, and release of important government reports about our tax and budget systems. All levels of government release many tax and budget reports throughout the year, why not highlight some key ones on April 30 to draw greater attention to them?

3. Our tax gaps are growing - The IRS estimates the federal tax gap at $458 billion per year. This is more than we collect from the corporate income tax even before the corporate rate was lowered by the Tax Cuts and Jobs Act. A report from the Treasury Inspector General for Tax Administration (TIGTA), Expansion of the Gig Economy Warrants Focus on Improving Self-Employment Tax Compliance (2/14/19) reports some alarming data that indicates we need greater taxpayer education and to better support positive taxpayer morale. Among many findings was that 25% of individuals in a sample of 3.8 milion gig workers filed a 1040, but didn't report their gig income on either the other income line or Schedule C. And, 13% with self-employment tax income who received Form 1099-K did not include Schedule SE or pay their SE tax with their 1040. The IRS also found a 237% increase from 2012 to 2015 in discrepancies between Forms 1099-K filed and what was reported on Forms 1040. 

    A 2018 report from the California Franchise Tax Board found that about 70% of gig economy service providers receive no tax reporting form, which increases non-compliance. With understanding of tax rules and recordkeeping low, compliance without reporting forms become a bigger challenge and frustration. A 2018 QuickBooks survey found that 32% of self-employed individuals admit they don't report all of their income.

The above threee items indicate to me that a Celebrating Taxpayers Day would be a positive step in building respect for our tax systems, building a culture of filing and paying and being proud of that fact, and improving understanding of our tax systems. And, hopefully have some fun with it!

Why April 30?  Well, people are still busy on April 15 filing and sometimes due to weekends and Emancipation Day, filing day falls on April 16 or 17 or 18.  April 16 is Emancipation Day (the day in 1862 when President Lincoln signed an emancipation decree for the District of Columbia). April 30 gives preparers time to recover, and individuals getting refunds to hopefully have them in time for the celebration. In history, April 30 is the day George Washington was inaugurated (1789), the U.S. Navy was formed (1798), San Jose State University formed** (1857), the ice cream cone was unveiled in the U.S. at the World's Fair in St. Louis (1904), and the World Wide Web emerged in the public domain by Tim Berners-Lee (1989) and its source code was released to the public in 1993.

On April 30, we still have income tax filings on our mind and have time to reflect on such things as, "well, next year, I'll keep better records," or "perhaps I should adjust my withholding." So April 30 would be a good day to help taxpayer get their tax compliance needs in order (January 1 would be better, but we all have too many other things we're focused on then). Also, bills are making their way through Congress, and June and November elections are coming up, and K-12 is still in session.

Yes, there is something called Tax Freedom Day® by the well-respected Tax Foundation. They describe this day as the one marking "how long Americans as a whole have to work in order to pay the nation’s tax burden." For 2019, it is April 16. It isn't a national celebration day though. Also, this information is useful, but I find it is easily misunderstood. Most people do not work until April 16 to pay their taxes but think they do when they hear this information, which harms understanding of our tax system. But it would be a good topic for discussion for April 30 Celebrate Taxpayers Day, to help improve tax literacy and transparency.

So, Celebrating Taxpayers Day on April 30. What do you think?


*See for example, Nellen, "'Oh, I See': Suggestions for Greater Tax Transparency," State Tax Notes, 11/20/17. Also, Nellen, Suggestions for Improved Transparency and Accountability of California Taxes and Related Information, 10/12/18.

**I'm not suggesting April 30 for the SJSU connection. In fact, I wasn't focused on the exact date of the founding of Minns' Evening Normal School (how SJSU started in San Francisco); on campus, we all just say SJSU was founded in 1857 (btw, I'm one of SJSU's historians).

NTA suggests greater transparency - great ideas!

https://taxpayeradvocate.irs.gov/reports/2018-annual-report-to-congress/NTA-Purple-Book 

The IRS National Taxpayer Advocate's Annual Report to Congress released in February ( IR-2019-11 (2/12/19) + Report) includes the 2nd edition of the “Purple Book” with 59 legislative recommendations to improve taxpayer rights and tax administration. Two of the recommendations aim to strengthen taxpayer rights. They also improve the transparency of the tax system, which is a principle of good tax policy.

The two recommendations:

1. Codify as Section 1 of the Internal Revenue Code:
        a. The Taxpayer Bill of Rights (at present, see Section 7803(a)(3)).
        b. A Taxpayer Rights Training Requirement, and
        c. The IRS Mission Statement

2. Require the IRS to issue all taxpayers a "receipt" that shows how their tax dollars are spent.

For details, see links and all 59 recommendations here.

These are great ideas as they bring greater attention to these important items to help taxpayer better understand the tax system and the federal budget. 

I recommend they go farther:

• Prominently display a link to the Taxpayer Bill of Rights on the IRS website (taxpayers won't read IRC Section 1, although I suspect the training requirement means IRS must help taxpayer to know of the TBOR).
• Create lesson plans for high schools that explain tax basics and the TB)R. The IRS already has some materials on its website, although most likely don't know it is there.
• A taxpayer receipt should be producible on the IRS website and lawmakers should be required to include a link on their websites. Individuals should be instructed where to find their tax liability on their 1040 and W-2 forms. The website should also have a tool for helping the individual estimate how much gasoline, alcohol, tobacco, airline, and other excise taxes they paid. And why not help them understand indirect taxes by including their share of the corporate income tax.
• The receipt should provide additional information such as:
• Average and marginal tax rates and how they compare to other taxpayers.
• Highlight tax breaks they received such as credits, itemized deductions such as the mortgage interest deduction, and exclusions such as employer-provided health care, etc. and the tax savings they derived from these preferences (perhaps even refer to them as subsidies).
• Their share of the national debt (and others in their filing family).
• Where to get more information to help them understand federal taxes and the budget.
• Contact information for their elected officials.
• I have more here - https://www.thetaxadviser.com/newsletters/2016/apr/transparency-for-individual-taxes.html.
  
• Update Section 7523 which requires Form 1040 instruction books to include a pie chart showing broad categories of federal revenues and another one showing broad categories of federal spending to be on the IRS website and linked on the webpage of other federal agencies and every member of Congress. For more, see my 2012 article on this topic.

I hope these recommendations are enacted. Our tax system and taxpayer benefits from greater transparency as people better understand their taxes and the system as a whole. They can ask better questions of their elected officials as to why rules are written the way they are, how the national debt will be paid down (and how we'll pay the growing interest expense on it).

What do you think?

9th Anniversary of the 21st Century Taxation Blog

Today is the 9th anniversary of when I started this blog!  I try to post at least once per week and this is my 871th post!  I get about three to five thousand views per month.  That keeps me going.

I started this blog when I was a fellow with the New America Foundation, charged with getting new ideas out, such as through op eds and articles.  I thought the blog would be a good additional technique and was a new thing back in 2007.

My goal continues to be focused on tax policy matters.  More specifically, how to modernize our tax systems and ensure they meet principles of good tax policy.

For this 9th anniversary, I'll note one topic I plan to focus on more over the next year - increased transparency in our tax systems and better tax literacy for all individuals.  More on this later (although I did recently post on it - 4/16/16 post.

Transparency for individual taxes

Transparency as a principle of good tax policy means taxpayers should understand taxes and how they apply to them. Despite lots of data on a filer's Form 1040, the one number people focus on is the amount due or refund. Clearly the better number is total federal income tax liability. And better yet, people should also consider other federal taxes paid - payroll, and excise taxes, as well as various state taxes. Computing one's marginal and average tax rates and knowing how they compare to other taxpayers is good. Knowing where the money goes is also good.

Some have proposed taxpayer receipts, but I think they generally are too vague.

I've got a short article - Transparency for individual taxes, in today's AICPA Tax Insider. It suggests ideas for getting more information to individuals so they can better understand their taxes. I also suggest a chart to use - by the filers or their return preparers, to help get this data.  You'll see a link in the article to a word version of the chart so you can modify it for your needs.

What do you think?

Connecticut helps taxpayers see effect of tax law changes

Connecticut has an interesting and fairly comprehensive revenue estimator tool to help anyone see the effect of possible tax law changes. I quickly found out that doubling the excise tax on gasoline (to 50 cents per gallon) raised $364,272,914, while lowering the sales tax rate from 6.35% to 6.00% lost $217,627,200. You can also change various tax credits and tax rates.  The tool shows you the overall effect of the changes.

This tool is on an Open Connecticut website that also has basic information on tax expenditures, tax credits, sources of revenue, and more.  It is a wonderful website for promoting transparency and improved understanding of the tax law and budget. I wonder how the state promotes its use and how many know about it and use it.

I encourage you to take a look at the tool and website - www.osc.ct.gov/openCT/.

What do you think?

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?

Greater transparency proposals for California budgeting - SB 14, SB 15 and SB 503

Two bills introduced in December 2010 to modify California budget processes will be the subject of a hearing in the Senate Governance and Finance Committee on March 30, 2011. SB 14 calls for performance-based budgeting. SB 15 calls for 2-year budgets, 5-year projections for revenues and expenditures and creation of an estimate of the long-term effect of the budget on the economy. In addition, the hearing will include SB 503 introduced in February that calls for analyses of personal and corporate tax credits in order to know if they are having the desired effect.

There are a few items in these bills that should bring about greater transparency in the budget process and tax system. I'll highlight two of them.

First, SB 14 would add Section 9147.8 to the Government Code to read as follows:

"9147.8.(a) Within one year of the effective date of the act that added this section, the Joint Sunset Review Committee shall adopt a process, schedule, and deadline for reviewing the performance of all programs at least once every 10 years. The schedule shall provide for reviewing programs with expenditures that total one-third or more of total expenditures by July 1, 2015, and that total two-thirds of total expenditures by January 1, 2018. For purposes of this section, "expenditures" include all funds as reflected in the Budget Bill submitted by the Governor, and statutory exemptions, deductions, credits, or exclusions from taxes or fees that would otherwise apply. For purposes of this act, "expenditures" also shall include the revenue and expenditures of state departments that are not reflected in the Budget Bill. The process established by the committee to review the performance of public programs shall reflect the principles of performance-based budgeting and shall include the participation of the Senate Committee on Budget and Fiscal Review and the Assembly Committee on Budget."

Second, SB 503 calls for data gathering and analysis for any new tax credit added after 2011. Specifically, such a new credit must "contain all of the following:
(a) Specific goals, purposes, and objectives that the tax credit will achieve.
(b) Detailed performance indicators for the Legislature to use when measuring whether the tax credit meets the goals, purposes, and objectives stated in the bill.
(c) Data collection requirements to enable the Legislature to determine whether the tax credit is meeting, failing to meet, or exceeding those specific goals, purposes, and objectives. The requirements shall include the specific data and baseline measurements to be collected and remitted in each year the credit is effective for the Legislature to measure the change in performance indicators, and the specific taxpayers, state agencies, or other entities required to collect and remit data.
(d) A requirement that the tax credit shall cease to be operative seven taxable years after its effective date, and as of January 1 of the year following the end of the operative period is repealed."

This all sounds good, but I don't expect it would apply too often as I don't see the state enacting new credits given the current budget problems.

It would be beneficial to the legislators and public if they had some of the information for existing tax credits.

What do you think?