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.