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? Professor Annette Nellen