California Governor Plans to Close FTB, Merge Agencies Into Department of Revenue

The Bloomberg BNA Tax Management Weekly State Tax Report filters through current state developments and analyzes those critical to multistate tax planning.

By Laura Mahoney

SACRAMENTO, Calif.—The Schwarzenegger administration will propose legislation to merge most functions of the California Franchise Tax Board, State Board of Equalization, and Employment Development Department into a new Department of Revenue (DOR) headed by a gubernatorial appointee, according to an outline of the plan obtained by BNA.

The plan expands greatly on a minor proposal Gov. Arnold Schwarzenegger (R) announced in May to consolidate only the tax collection functions of the three agencies as part of his budget plan for the fiscal year that begins July 1. Michael Genest, the governor's director of the Department of Finance, told BNA June 8 the administration developed the sweeping consolidation plan as part of its overall plans to improve state government.

With the state facing a chronic budget shortfall that translates into a $24 billion deficit for the coming fiscal year, the broad tax consolidation plan is one of a slew of proposals from the governor's office to eliminate or consolidate state agencies, boards, and commissions, and cut state spending.

Under the plan, the FTB's current executive director, Selvi Stanislaus, would most likely be named initially as secretary of the DOR beginning Jan. 1, 2010, Genest said. Stanislaus would oversee the merger of tax collections, information technology, records, audits, administrative support, payment processing, and taxpayer relations at the three existing departments.

Vote of Confidence for the FTB


Rolling the agencies under the existing FTB management is “a vote of confidence” in the effectiveness and efficient operations of the agency, Genest said. The agency is efficient and responsive, and has a strong corporate culture that makes Stanislaus the logical leader of the new department.

The FTB, which administers state personal and corporate income taxes, is now comprised of three members: the state director of finance appointed by the governor, the elected state controller, and the elected chair of the State Board of Equalization.

The board's authority to adopt regulations and administer state income tax programs would transfer to the new secretary of revenue. The FTB also has 5,200 staff positions, which would transfer to DOR.

The elected five-member SBOE oversees the state sales and use tax, property tax for state-assessed property, and 26 special taxes and fees. The SBOE also adjudicates disputes between taxpayers and the FTB or SBOE staff, and in this capacity is the only state body of its kind in the country.

SBOE Would Retain Property Tax, Adjudicatory Functions

Under the administration's plan, the SBOE would retain only the property tax and adjudicatory functions, leaving it with 200 of the 4,000 current staff positions. The remaining staff and functions of the board would transfer to the new department.

The five members of the SBOE are the state controller and four members who are elected from distinct geographic districts in the state.

The 1,540 employees of EDD who administer state payroll taxes would also be merged into DOR. Another 7,800 employees would remain at EDD to continue to run other programs including unemployment and disability insurance, employment services, and equal employment opportunity enforcement.

By eliminating the three-member FTB, Genest said the proposal would make the governor directly accountable for state tax administration and policy. DOR would still conduct business in the public eye through public hearings and meetings for interested parties on major policy initiatives, and the politics that sometimes enter into FTB and SBOE decisions would be minimized.

A spokesman for State Controller John Chiang (D), who serves on both the SBOE and the FTB, said in a written statement that Chiang is reviewing the proposal.
Chiang “is waiting to hear from the administration on what savings would be achieved, how tax collections would be more efficient, the extent to which taxpayer service would be impacted, and … the effects of moving the state's critical revenue functions away from independent oversight,” spokesman Jacob Rober told BNA June 8.

Staff Reductions, Savings Not Clear Yet

Merger of the three agencies would result in a department with 10,754 staff positions and a budget of $1.1 billion, according to the administration proposal. Genest said the administration has not yet estimated the number of staff positions that would be eliminated or the amount of spending that could be cut through the consolidation.

The plan would require initial spending on a new building to house the department, most likely on the existing campus of the FTB in Sacramento, as well as investment in new computer systems across the department.

Savings would likely result from consolidated payment processing and taxpayer records, as well as business auditing, filing enforcement and collections activities, administrative services, and taxpayer contact resources, according to the plan.

Genest said the state would not necessarily spend more to update the computer systems of a new DOR than it would to update and maintain existing systems at the EDD, FTB, and SBOE. Those systems must already be updated regularly to remain effective.

“It's not anything we wouldn't do anyway, we'll just be doing it in one place instead of three.”

Meanwhile, the SBOE headquarters building in downtown Sacramento has been plagued by construction defects, water leaks, and mold infestations, and the state is considering whether to sell it and move the SBOE staff elsewhere. It may make the most sense to construct a new building for those employees at the FTB headquarters, Genest said.

Possible consolidation of the three state tax agencies will be the subject of a hearing scheduled June 10 before the Senate Revenue and Taxation Committee. A representative of the governor's Department of Finance will speak about the administration's proposal. Representatives of the Legislative Analyst's Office, and government reform group California Forward, will discuss consolidation options. The hearing is scheduled for 1:30 p.m. at the state Capitol.