Aghast Lawmakers May Break Up California Tax Board

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By Laura Mahoney

California lawmakers shocked by the dysfunction at the State Board of Equalization are considering breaking up the tax agency and banning free communication between elected board members and taxpayers appealing their assessments.

At a Senate budget oversight hearing April 20, members said they want to consider all options to reorganize the SBOE in response to Gov. Jerry Brown’s (D) request for legislation on the topic by June. Options range from limiting board member authority to stripping the elected board of its tax administration duties or seeking a state constitutional amendment to abolish the board.

Some on the panel were surprised to learn that board members can engage in ex parte communications by meeting privately with taxpayers appealing their assessments in advance of an oral hearing before the board without disclosing those communications or recusing themselves from those cases.

“It’s like meeting with the judge behind closed doors,” Sen. Steve Glazer (D), member of the Senate Budget Subcommittee on State Administration, said while questioning the board’s senior staff. “And there’s no disclosure requirement in your rules?”

“No,” said Amy Kelly, acting chief counsel for the SBOE.

“Wow,” Glazer said.

Ban Likely

Subcommittee chair Sen. Richard Roth (D) told Bloomberg BNA after the three-hour hearing that he wants a ban on ex parte communications to be part of legislation to change the troubled board.

“When you are going to be adjudicating a tax dispute, just like the rules in superior court, the court of appeal, the supreme court or before an administrative law judge, there needs to be a rule against it,” he said.

Delving into the audit released March 30 by the governor’s Department of Finance, tax agency staff confirmed at the hearing that board members interfere in day-to-day operations and threaten them if they don’t go along.

Executive Director David Gau, who has been in the post for almost a year, said he is one of the senior managers who has been threatened by board members.

“In my case, recently, I was threatened,” he told the committee.

“So who do you complain to?” Roth said.

“That’s what I’m dealing with now, and that’s why I have to be careful,” Gau said.

Potential Litigation

Gau testified April 5 before an Assembly budget oversight committee that he couldn’t respond to questions because of “potential litigation.” He was more forthcoming before the Senate committee April 20, saying the board had conveyed its full support to him as executive director in the previous week.

Gau said he wants to be part of the Legislature’s discussion about how to fix the SBOE.

“We are at a tipping point, sir,” Gau said. “I think there are structural reforms that need to take place at the Board of Equalization.”

Senators were frustrated to hear from the SBOE managers that the agency is continuing to violate state rules by shifting some employees from revenue-generating work such as auditing to public outreach. The audit found at least 47 employees who were shifted for either short- or long-term periods, as well as more than 100 others who worked at a one-day conference in November called Connecting Women to Power to perform duties from managing the parking lot to registering attendees.

Rules Since 1999

Since 1999, the California Budget Act has required that the SBOE get approval from the Department of Finance and notify lawmakers before they move revenue-generating staff such as auditors to other duties. Lawmakers imposed this rule after the California State Auditor found the agency had redirected 127 of 250 new audit positions the tax agency gained in the preceding eight years to perform support work, not audits.

The chief of the DOF’s Office of State Audits and Budgets told the committee that while the office was conducting the audit, her staff received anonymous complaints about threats from board members, as well as complaints about board members or people on their personal staffs who tried to influence the outcome of audits the agency was performing.

OSAE Chief Jennifer Whitaker said those complaints were outside the scope of the audit and the office passed them along to other authorities “since there are other investigations going on at this time.”

Powers of Investigation

Gau said the relationship between the board members and the agency is at the heart of the changes to be considered.

Board members rely on a provision of the Government Code that gives them the duty to “investigate the administration, enforcement and operation within the district from which he is elected of all laws.” The code vests the administration and enforcement of the laws with the board as a whole.

A May 16, 2016, memo from former SBOE Chief Counsel Randy Ferris offered guidance to the board members for the first time about the meaning of that provision, Kelly told the committee. According to the memo, the investigatory powers of the board members include actions such as asking agency staff to explain their actions on behalf of a constituent or arranging meetings between taxpayers and staff.

“In short, the investigatory powers of individual members do not empower individual members to give direction regarding how any particular constituent concern should be resolved,” the memo said. If a member finds that tax and fee rules aren’t being followed, his or her duty is to inform the executive director.

‘On a Frolic’

Roth called the provision awkward.

“I suspect it was not contemplated by the drafters that you would take that information and go off on a frolic of your own inside the Board of Equalization,” he said.

Kelly acknowledged that the investigatory powers provision “has been misread.”

Sen. Scott Wilk (R) said he was surprised by what he sees as a failure of leadership.

“Is it just board members gone wild, or is it deeper than that?” he asked.

The Legislative Analyst’s Office offered options for the Legislature to consider to make major changes to the SBOE, noting that the board’s unique structure giving the elected members the roles of administrators, arbiters and advocates creates conflicts.

“It is extremely difficult—if not impossible—for a single entity to perform all of these functions effectively,” the LAO said in a summary of options presented to the committee.

Options for Change

The LAO said changes the Legislature could make within the existing structure include:

  •  removing district-specific duties for board members;
  •  restricting board member interactions with staff;
  •  limiting board power over the agency’s executive staff;
  •  strengthening rules for campaign contribution and so-called behested payments members can solicit for nonprofit organizations;
  •  restricting ex parte communications with taxpayers appealing their cases to the board; and
  •  allowing the Franchise Tax Board to appeal the board’s rulings in tax appeals.
Options for major changes include:
  •  shifting most of the SBOE’s administrative duties to other agencies or a new agency and leave only the functions mandated in the California Constitution for the board, such as equalization of property tax assessments among the state’s 58 counties;
  •  removing the appellate functions from the board and creating a specialized tax court;
  •  consolidating most of the tax functions of the SBOE, FTB and Employment Development Department under one Department of Revenue with an executive director appointed by the governor; and
  •  submitting a constitutional amendment to voters to eliminate the board.
Roth said lawmakers will be taking their cues from Brown, but will be working on options in the next few months.

The California Constitution gives the SBOE the authority to equalize the valuation of taxable property among the state’s 58 counties and set the value for public utilities such as railroads and power companies, along with a few duties related to specific taxes or fees added in recent years.

Lawmakers have gradually added other administrative duties to the board’s roster since it was created in 1879, namely administration of the sales and use tax, hearing taxpayer appeals and issuing regulations.

Lawmakers also can strip those duties from the board.

To contact the reporter on this story: Laura Mahoney in Sacramento, Calif., at LMahoney@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

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