Suggestions for Improved Transparency and Accountability of California Taxes via Improved Tax and Budget Literacy

• Jurisdiction: California,United States
• Author: By Annette Nellen, CPA, Esq.
• Citation: Vol. 28 No. 3
• Publication year: 2020

Suggestions for Improved Transparency and Accountability of California Taxes Via Improved Tax and Budget Literacy

By Annette Nellen, CPA, Esq.¹

I. INTRODUCTION

Californians pay a variety of taxes and are often asked to vote on ballot initiatives that involve taxes, such as how business income should be apportioned or if tax rates should be increased. Despite the significance of taxes to all individuals—both directly and indirectly, as well as sometimes even at the ballot box, the understanding of taxes among the public is low. For example, taxpayers are unlikely to be able to do the following:

• State how much they pay to the state for income taxes, sales and use tax, and various excise taxes, as well as their share of corporate income tax.
• Explain the rate structure for the income tax, and the types of exclusions, deductions and credits provided (as well as the meaning of these terms).
• Explain where their tax dollars go at both the state and local levels.
• Understand their tax situation in relation to other taxpayers.
• Understand the taxes paid by their employer and other employers (whether for profit or nonprofit).
• Know and understand the operation and benefit of various tax preferences provided for health care, housing, retirement savings or higher education expenses,² as well as other tax preferences, or know the role and effect of tax preferences in a tax system and within the government system of distributing various benefits.
• Explain the purpose of various tax incentives, or to distinguish between a tax preference (tax expenditure) and a provision that is part of the basic design of a particular tax (such as the standard deduction in the personal income tax), or to understand that tax preferences usually are a type of government spending performed through the tax system rather than via direct spending.³
• Explain how various tax preferences benefit themselves relative to individuals with different income levels or how to appropriately measure and compare the benefits.
• Know where to get more information about California's tax structure or budget or gain awareness or understanding of legislative proposals for tax law changes.

A low understanding of a jurisdiction's tax system despite paying taxes, indicates a tax system weakness of not being transparent or accountable to taxpayers—two principles of good tax policy. Not meeting these principles can also lead tax systems to not measure up well against other principles such as simplicity and equity. Understanding taxes should also help support voluntary compliance and positive tax morale.⁴

When taxpayers better understand tax systems and the effect of these taxes on government finances, they can be described as having a high degree of "tax literacy" which will also improve "budget literacy." There are numerous ways that the State of California can help individuals improve these literacies. The outcome should be an improved tax system in that increased tax and budget knowledge of taxpayers will help the system to better meet the principles of good tax policy. In addition, it helps taxpayers play a more significant role in state and local functions and interactions with elected officials and candidates for office due to having a more complete understanding of fiscal matters.

This article presents suggestions to help improve tax and budget literacy among the public. While the focus is on California taxes, the suggestions would be appropriate in any jurisdiction including at the federal level. The suggestions offered fall within the following categories:

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1. Tax returns, instructions and publications.
2. Taxpayer receipt.
3. Information in public spaces.
4. Transparency website.
5. Basic information accompanying tax legislative proposals.
6. Information and celebration events in the community.
7. K-12 education.

Implementation considerations are also addressed. The article begins with a brief review of principles of good tax policy. These foundations are crucial to an effective tax system and help guide the suggestions offered here for improving tax and budget literacy.⁵

II. TAX POLICY REVIEW

A. Definitions

Various formulations of principles of good tax policy exist. For example, the National Conference of State Legislatures (NCSL) has a document entitled, Principles of a High-Quality State Revenue System.⁶ The nine principles of this system are (taken verbatim from the NCSL report):

1. A high-quality revenue system comprises elements that are complementary, including the finances of both state and local governments.
2. A high-quality revenue system produces revenue in a reliable manner. Reliability involves stability, certainty and sufficiency.
3. A high-quality revenue system relies on a balanced variety of revenue sources.
4. A high-quality revenue system treats individuals equitably. Minimum requirements of an equitable system are that it imposes similar tax burdens on people in similar circumstances, that it minimizes regressivity, and that it minimizes taxes on low-income individuals.
5. A high-quality revenue system facilitates taxpayer compliance. It is easy to understand and minimizes compliance costs.
6. A high-quality revenue system promotes fair, efficient and effective administration. It is as simple as possible to administer, raises revenue efficiently, is administered professionally, and is applied uniformly.
7. A high-quality revenue system is responsive to interstate and international economic competition.
8. A high-quality revenue system minimizes its involvement in spending decisions and makes any such involvement explicit.
9. A high-quality revenue system is accountable to taxpayers.

The American Institute of Certified Public Accountants (AICPA) suggests a set of twelve principles of good tax policy.⁷ These are explained as follows (taken verbatim from the AICPA report):

1. Equity and Fairness. Similarly situated taxpayers should be taxed similarly.
2. Certainty. The tax rules should clearly specify how the amount of payment is determined, when payment of the tax should occur, and how payment is made.
3. Convenience of Payment. Facilitating a required tax payment at a time or in a manner that is most likely convenient for the taxpayer is important.
4. Effective Tax Administration. Costs to collect a tax should be kept to a minimum for both the government and taxpayers.
5. Information Security. Tax administration must protect taxpayer information from all forms of unintended and improper disclosure.
6. Simplicity. Simple tax laws are necessary so that taxpayers understand the rules and can comply with them correctly and in a cost-efficient manner.
7. Neutrality. Minimizing the effect of the tax law on a taxpayer's decisions as to how to carry out a particular transaction or whether to engage in a transaction is important.
8. Economic Growth and Efficiency. The tax system should not unduly impede or reduce the productive capacity of the economy.
9. Transparency and Visibility. Taxpayers should know that a tax exists and how and when it is imposed upon them and others.
10. Minimum Tax Gap. Structuring tax laws to minimize noncompliance is essential.
11. Accountability to Taxpayers. Accessibility and visibility of information on tax laws and their development, modification and purpose, are necessary for taxpayers.
12. Appropriate Government Revenues. Tax systems should have appropriate levels of predictability, stability and reliability to enable the government to determine the timing and amount of tax collections.

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The principles of good tax policy or a high-quality revenue system that are the focal point of this paper involve transparency (#9 on the AICPA list) and accountability (#11 on the AICPA list and #9 on the NCSL list).

The NCSL further explains that the "essence of accountability" requires tax laws to be "explicit, not hidden." Debate should be encouraged by widely publicizing proposals to change the tax rules. The NCSL also promotes the use of tax expenditure reports to help meet the accountability principle. The NCSL suggests that such reports show not only the "revenue loss" or cost of tax preferences, but also provide information "to evaluate the effectiveness and efficiency of" the policies that underlie various tax preferences.⁸

In line with the NCSL, the AICPA states that accountability to taxpayers allows for "broader and more well-informed debate" about tax changes. The AICPA observes that to achieve this principle, taxpayers need "access to information for understanding sources and uses of tax revenues." The AICPA also highlights that accountability helps improve respect for the tax system.⁹

The AICPA combines transparency with visibility as necessary to allow taxpayers "to know the true cost of transactions." The Government Accountability Office (GAO) lists transparency as a criterion for a "good tax system" along with equity, economic efficiency, simplicity and administrability. Per the GAO:¹⁰

"The transparency of a tax system refers to taxpayers' ability to understand how their liabilities are calculated, the logic behind the tax laws, what their own tax burden and that of others is, and the likelihood of facing penalties for noncompliance."

Achievement of the principles of transparency and accountability to taxpayers require that taxpayers have adequate and appropriate information that is easily accessible and understandable.

B. Benefits of Increased Transparency and Accountability to Taxpayers

When a tax system meets the principles of transparency and accountability to taxpayers, it is more likely to also meet other principles of good tax policy. For example, if individuals better understand the concepts of progressivity and regressivity, they are more likely to question lawmakers about deductions, exclusions or exemptions that provide greater benefits to higher income taxpayers relative to lower income taxpayers. They might demand changes that allow the system to better achieve principles of good tax policy. They might also seek changes in what government subsidies are provided via direct spending versus the tax...