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Push Out and Digitally Empower Data for Much-Needed Tax Transparency

Posted on May 16, 2022
Annette Nellen
Annette Nellen

Annette Nellen is a professor at San José State University and director of the graduate tax program. She is a former chair of the American Institute of CPAs Tax Executive Committee and an active member of the taxation sections of the AICPA, American Bar Association, and California Lawyers Association.

In this installment of Moving Forward?, Nellen expands on an issue she raised 10 years ago: the need to move tax and budget data into the digital age so it can better inform the public.

Copyright 2022 Annette Nellen.
All rights reserved.

I. Despite Being at the Edge of Web 3.0, A 1990 Tax Transparency Plan Remains at the Printing Press

A. Omnibus Budget Reconciliation Act of 1990

Long ago in 1990 Congress included a provision in a tax bill to help individuals know how their tax dollars were used and the sources of government revenue.1 That was before over 90 percent of the public had access to the internet and email. It was before eBay Inc., Amazon.com Inc., and Google existed. It was back when the IRS mailed a blank Form 1040 inside an instruction book — which included the taxpayer’s Social Security number, name, and address — to individuals who had filed a Form 1040 the prior year. So it is no surprise that a 1990 congressional effort to get more tax and budget information to taxpayers resulted in requiring the IRS to include two pie charts in the 1040 instruction booklet to summarize federal revenue sources and spending categories.

Since 1991, these two pie charts have been included in each year’s Form 1040 instruction booklet. In the first year of publication the graphs were at the beginning of the booklet (page 5 of 80 pages). Starting in 1992, the graphs were moved to the final pages. For 1992 through 1994, the graphs were on the last page of the instruction booklet, where they would be quite visible when individuals pulled the booklet from their mailboxes.2 In later years they were usually in the last five pages, but not the last page.

Section 11622 of the Omnibus Budget Reconciliation Act of 1990 (OBRA) added IRC section 7523, Graphic Presentation of Major Categories of Federal Outlays and Income. It provides that “any booklet of instructions for Form 1040, 1040A, or 1040EZ, prepared by the Secretary for filing individual income tax returns . . . shall include in a prominent place —

  1. a pie-shaped graph showing the relative sizes of the major outlay categories, and

  2. a pie-shaped graph showing the relative sizes of the major income categories.”

Section 7523(b) lists six outlay categories and five income categories. The graphs are to include footnotes with a few more details such as stating that the outlay category for “physical, human and community development” consists of “agriculture, natural resources, environment, transportation, education, job training, economic development space, energy, and general science.” That statement also tells anyone reading it that there are a lot more federal spending categories than those shown in the six-slice pie graph.

The conference report to OBRA noted that the IRS included pie charts in Publication 17, “Your Federal Income Tax,” despite no requirement to do so. Section 7523 was added to OBRA by the conference committee rather than by either the House Ways and Means or Senate Finance committees.3

B. The Pre-Internet 1990 Version of Section 7523 Lives On

Despite numerous opportunities since 1990, section 7523 is unchanged and continues to call only for posting the two graphs in the instruction “booklet” despite the fact that more individuals would see the graphs if posted on the IRS website, which was launched in 1996.4 Likewise, no change has been made to require additional and more detailed data or any interactive features that the internet readily enables.

With increasing numbers of individuals using tax return preparation software, the IRS stopped mailing forms and instructions to individuals in 2010.5 While the IRS still creates a Form 1040 instruction booklet, most individuals likely never look at it although some public libraries and IRS offices may have copies. Few individuals likely even look at the instructions on the IRS website, but instead rely on tax return preparation software and internet search engines to answer any question they have in completing Form 1040 and its attachments.

Yet the 1990 law calling for the two pie graphs to be included in the Form 1040 instruction booklet continues as if it were still 1990. In the PDF version of the 2021 instruction booklet, which is 114 pages, the charts appear on page 109.6 These graphs are reproduced here in Exhibit 1 with the footnotes, as likely fewer than 10 percent of individual filers looked at them or even knew they were in the instruction booklet. For contrast and comparison, Exhibit 2 includes the pie graphs first required to be included in the 1991 Form 1040 instruction booklet (for fiscal 1990).

C. Maryland Requires Expenditure Categories on Tax Forms and the Web

Maryland requires the comptroller to include on specified income tax forms “a demonstrative representation of how much of each dollar that the General Fund receives is spent on . . . (I) education; (II) health; (III) public safety; and (IV) any other category included by the comptroller.” The demonstration can be a graph or picture or combination of these two. The information is also required to be posted on the comptroller’s website.7 The required graphic display for the 2021 Maryland individual tax form instructions is included as Exhibit 3.8

II. Maximize Modern Technology to Supercharge Two Meager Pie Charts

A. The Importance of Transparency and Accountability for Tax Systems

Transparency and accountability are important principles of good tax policy and must be considered to achieve effective tax systems. The Government Accountability Office explains: “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.”9

Exhibit 1.

Closely aligned with transparency in a tax system is accountability. The National Conference of State Legislatures states: “The essence of accountability is that tax burdens should be explicit, not hidden.”10

The NCSL further explains that tax credits and exemptions should be reviewed regularly to know their “cost (in lost revenue)” and whether they help some at the expense of others. The group also observes that when taxes are designed with an indirect burden to consumers, there is less accountability than when the tax is “directly and openly” imposed on taxpayers.11

The annual requirement and ritual of filing one’s federal and state income tax returns is a good opportunity to provide information to individuals to help them better understand not only their own tax situations but also the jurisdiction’s tax and budget systems. Providing the information in a meaningful and interactive way is feasible and advisable. The delivery should use methods to ensure that taxpayers do not overlook the information, can understand it and its importance, and can see how their personal tax information relates to the overall system and to other taxpayers.

The current releases by the IRS and Maryland are too hidden in terms of both location and lack of details to achieve principles of tax system accountability and transparency.12 For example, the expenditure charts show only direct outlays and not tax expenditures (that is, spending in the tax system). At the federal level, tax expenditures can be larger than discretionary outlays.13 Not including all types of outlays in a budget explanation does not provide taxpayers with a full understanding of government spending and how they directly and indirectly benefit from that full range of spending. Also, as explained below, there are more types of data and explanations of taxes that can readily be provided to taxpayers including in formats that enable viewers to see the data in ways that are meaningful to them and in ways that allow them to format the results in ways that are most understandable to them.

B. Tax Agency and Other Government Websites Are Extremely Popular

For the week ending April 15, 2022, the IRS reported there were 571,818,000 visitors to its website. Oddly, that is an almost 52 percent drop from the week ended April 16, 2021, when there were close to 1.2 billion visitors.14

For fiscal 2020, the IRS reports that there were over 9 billion page views and about 1.5 billion visits to the irs.gov website.15 While these figures likely include many repeat visitors, the figures are high given the filing of Forms 1040 by over 157 million individuals and just over 11 million corporate and partnership returns for fiscal 2020.16

Data on state tax agency website usage are not readily available.

C. How Readily Available Data and Technology Can Better Inform the Public

Creative groups of tax agency employees, advisory boards, constituents, elected officials, web designers, and accessibility experts can design online tools and websites that provide tax and budget information well beyond and far more useful than what is currently presented in the Form 1040 and Maryland tax instructions.17

More graphs: Federal and state government agencies have a tremendous amount of data to share. This includes tax revenues broken down by type of taxpayer and income level, spending in more detailed categories including tax expenditures, outstanding debt, trust fund balances, tax gap estimates for each type of tax and its causes, and how much compliant taxpayers pay to cover this lost revenue. Graphic displays of this information can be presented to the public.

Exhibit 2.
Exhibit 3.

Online displays: Tax and budget data should be displayed on popular government websites rather than only in instruction booklets that few taxpayers access. Websites of popular government agencies such as the Social Security Administration, state departments of motor vehicles, and those of elected officials should have data on the main website with links for more information. These displays should include access to taxpayer receipts and to dashboards.

Dashboards: A data dashboard provides lots of information, such as to corporate employees, that provides a picture of specified metrics. For example, a dashboard for a business might be set up to show sales for the day, week, and month for various stores and compare it to a prior period. The dashboard’s software might allow users to specify the data report they want. Key to operation is that existing data sources, such as real-time sales at stores, is directed to the dashboard.

A dashboard can be set up by a government to enable users, including the public, to get current information and reports they request. The Texas comptroller has a transparency website that provides “dashboards and data visualizations.” Available data include 25 state revenue categories, 18 expenditures categories, payments to some payees, travel payments by agency, and “economic development spending by fund, expenditure category and recipient.”18 The Texas dashboard allows users to specify the data, agency, and period for which they want to produce a report.

A dashboard website would allow for far more detail than exists with the two pie graphs in the Form 1040 instruction booklet. While the graphs are interesting and can catch attention of anyone who finds them, the graphs should also be on the IRS website and those of elected officials. The graphs should include a link to a dashboard where visitors can pull far more information, such as by more detailed revenue and spending categories including tax expenditures (rather than only direct government spending). Links providing explanations on how the dashboard works and the terminology used plus examples of reports that can be produced and how to use them must also be available at the dashboard website.

Taxpayer receipts: Much more can be done than present static, aggregated data. Interactive websites can be created to allow individuals to enter their data to get more information about their tax situation and how it compares to average taxpayers in their income group and other income groups. These interactive websites can start with individuals entering relevant lines from their federal and state tax returns, and other taxes they pay such as employment taxes, gasoline and other excise taxes, sales taxes, and property taxes. Embedded calculators can be added to these websites to easily provide the information. For example, a person can be asked how many miles they drove during the year and the year and model of their vehicle so miles per gallon can be entered to calculate their federal and state gasoline excise taxes. Census bureau data can be used to estimate the individual’s spending based on income and family size, and the state sales tax rate applied to the taxable categories to measure sales tax paid.

Taxes paid indirectly should be part of the available information. These include employment taxes paid on wages by the employer, property taxes embedded in rent, and corporate taxes. Sometimes we hear politicians and others say that about half of individuals do not pay taxes.19 These statements are incomplete and incorrect. While about 57 percent of individuals do not pay federal income tax,20 they certainly pay many other types of taxes directly, such as employment taxes and sales taxes, and indirectly such as the employer share of employment taxes and various excise taxes. Including all these taxes on the taxpayer receipt would provide a more complete understanding of the taxation for the person receiving the receipt.

A summary of information that could be included on a taxpayer receipt:

  • federal and state income taxes from the individual’s tax returns;

  • marginal and average tax rate on each type of income (wages and interest income, self-employment income, and capital gain income);

  • employment taxes paid by the taxpayer and employer;

  • state and local sales taxes;

  • federal and state excise taxes on telecommunications, alcohol, tobacco, gasoline, airfare, and cannabis;

  • property taxes paid directly by homeowners and indirectly by renters;

  • hotel occupancy taxes based on number of nights stayed and location;

  • significant local taxes beyond property taxes;

  • share of corporate taxes based on income as generated from wages and capital;

  • share of national debt; and

  • names, email addresses, and websites of their elected officials should they have any questions or comments to share.

As noted, much of this information is not readily available to each taxpayer. But the interactive website tool can include data and formulas to calculate the above information in general terms based on income, address, type of vehicle, etc. The receipt can also show the individual’s income quintile. It can show how much others in that income group pay in various taxes and what amounts individuals in the other income categories pay.

The online receipt calculator can also ask about tax breaks, including pulling data from the Form 1040 such as mortgage interest expense and information that individuals will need more effort to gather such as the value of fringe benefits provided by their employers. Information on various income exclusions and tax credits can be input to help individuals see the tax breaks they receive and government spending they benefit from. A comparison can be provided of what their average and marginal tax rates would be if these tax breaks did not exist. The receipt should include links to where individuals can get more information on terminology and the meaning of the receipt components.

Recent sessions of Congress have usually seen proposals to require the IRS or Treasury to create a receipt for taxpayers. In the current 117th Congress, S. 1706 and H.R. 3331, the Taxpayer Receipt Act, call for Treasury to provide each individual filer with “a one-page document which contains, with respect to the most recently completed fiscal year —

(1) total Federal outlays during such year;

(2) total Federal revenues collected during such year;

(3) the Federal deficit or surplus for such year; and

(4) the total Federal debt held by the public.”

These bills do not state how the information is to be provided to each individual taxpayer. The document described in the bills is not really a receipt because it is not tied to what each taxpayer pays in taxes directly or indirectly.

III. Moving Forward

No doubt, the revenue and spending pie graphs made available to over 150 million individual taxpayers since 1991 is still a good step toward better transparency in our tax system. But 21st century technology allows data to be digitally strengthened and empowered to be useful far beyond two static graphs buried in an obsolete paper instruction booklet. The graphs need to be moved to key websites, made interactive and proactive (such as producing a receipt for each visitor), and promoted through public awareness campaigns of the IRS, other agencies, and elected officials. States can model their systems on a federal one for consistency and ease to users in learning more about state fiscal matters.

Modernizing IRC section 7523 would be a good first move along with funding to create dashboards, taxpayer receipts, and other tools to help individuals understand our federal tax and budget systems. That legislative action could bring attention to the original provision that continues today in its 1990 form. Public input should be solicited to better understand what they would find useful along with how to provide that information. The updating of this federal provision should cause state tax agencies and lawmakers to see what they can do to improve transparency for state tax systems.

So let’s fix IRC section 7523 as a helpful step to better tax system transparency for both federal and state tax systems.

 

FOOTNOTES

1 Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508; Nov. 5, 1990), section 11622.

3 Conf. Rep. No. 101-964, xxth Cong., 2d Sess., 1991-49 IRB 55.

4 For an overview of the start of the IRS website and its features, see Robert S. Horwitz and Annette Nellen, “FAQs: Problems With the Process of Informal Guidance From the Internal Revenue Service,” State Bar of California, Taxation Section (2012).

5 Nellen, “Time to Move Sec. 7523 Budget Information Into the Digital Age,” AICPA Tax Insider, Nov. 8, 2012.

6 See links to Form 1040 and instructions at IRS, “About Form 1040, U.S. Individual Income Tax Return” (updated Mar. 14, 2022).

7 Maryland S.B. 604 (chapter 536, 2014). S.B. 604 was approved by the governor on May 15, 2014. Yet the 2013 Maryland instruction booklet was the first to include the expenditure graphic. It is unclear whether earlier legislation required the graphic in the instructions and the 2014 legislation also required it to be posted on the comptroller’s website. The comptroller’s website landing page does not include the expenditure graph (viewed April 27, 2022) or have an obvious link to it. There is a link to where various budget documents can be found (https://www.marylandtaxes.gov/index.php).

8 The author was unable to find any other state that mandates inclusion of budget graphics in the individual income tax instructions.

9 GAO, “Understanding the Tax Reform Debate: Background, Criteria, & Questions,” at 5 (Sept. 2005). For more on the importance of transparency in tax systems, see Nellen, “‘Oh, I See’ — Suggestions for Greater Tax Transparency,” State Tax Notes, Nov. 20, 2017, p. 731.

10 NCSL, “Tax Policy Handbook for State Legislators,” at 3 (Feb. 2010).

11 Id.

12 Providing information to taxpayers is only one way that tax systems can better meet the principles of accountability and transparency. These principles must also be considered in the design of tax rules and systems.

13 Congressional Budget Office, “The Budget and Economic Outlook: 2021 to 2031” (Feb. 11, 2021). This report’s appendix on tax expenditures explains that in 2021, tax expenditures were estimated to be $1.8 trillion while discretionary outlays were estimated at just under $1.7 trillion (p. 2, 20). Per the CBO:

Tax expenditures have a large effect on the federal budget. In fiscal year 2021, the value of the more than 200 tax expenditures in the individual and corporate income tax systems will total an estimated $1.8 trillion — or 8.2 percent of gross domestic product — if their effects on payroll taxes as well as income taxes are included. That amount, which was calculated by CBO on the basis of estimates prepared by [the Joint Committee on Taxation], equals about half of all federal revenues that are projected to be collected in 2021 and exceeds all projected discretionary outlays combined (see Figure A-1).

Id. at 19-20 (footnotes omitted).

14 It seems odd that the usage was so different for these two weeks in April 2021 and 2022 including the fact that the due date for 2020 returns was extended to May 17, 2021 (IR-2021-59, Mar. 17, 2021) while the due date for the 2021 individual returns was April 18, 2022. IRS filing season data for current and past years is available at IRS, “Filing Season Statistics by Year,” updated Apr. 22, 2022.

15 IRS, “Data Book, 2020,” at 21.

16 Id. at 4.

17 Additional suggestions for transparency for taxpayers can be found in this author’s prior articles. Nellen, “Transparency for Individual Taxes,” AICPA Tax Insider, Apr. 14, 2016; Nellen, “‘Oh, I See’ — Suggestions for Greater Tax Transparency,” supra note 9; Nellen, “Suggestions for Improved Transparency and Accountability of California Taxes Via Improved Tax and Budget Literacy,” 28(3) Cal. Tax Law. 18 (Jan. 2020).

18 Texas Comptroller, “Transparency — Open Data Tools and Information” (undated).

19 Joseph J. Thorndike, “Do Taxpayers Make Better Citizens? Rick Scott Thinks So,” Tax Notes State, Feb. 28, 2022, p. 1005.

20 Howard Gleckman, “Scott’s ‘Skin in the Game’ Plan Could Raise Taxes by $100 Billion in 2022, Mostly on Low- and Moderate-Income Households,” Urban-Brookings Tax Policy Center, Feb. 24, 2022. The 57 percent figure is for 2021.

END FOOTNOTES

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