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The California State Board of Equalization’s public image may be what is driving Gov. Jerry Brown (D) and lawmakers to change the tax agency’s structure by June.
However, those who are most familiar with the board are focused on changes to its more private functions such as audits, tax appeals and setting tax policy.
Lawmakers are working to respond to Brown’s April request that they quickly enact statutory changes to the board after a scathing audit. Brown said in an April 13 letter to the board that interference from elected board members in the agency’s operations “undermines its ability to carry out its core mission: the collection and administration of sales and use taxes and other revenues.”
No specific proposals have surfaced yet, but critics of the SBOE told Bloomberg BNA they see the governor’s request as an opportunity to fix persistent conflict that underlies the board’s political struggles—that California is the only state with elected officials who both administer taxes and adjudicate appeals from taxpayers.
“As long as that exists, we’ll go from crisis to crisis,” former Sen. Lois Wolk (D) told Bloomberg BNA. “We have a 19th Century, corrupt, political and not very fair, effective or efficient tax system.”
Wolk and former Senate President Pro Tempore John Burton (D) were the last to introduce bills, in 2004, to make major changes to the SBOE by creating a state tax court. Those bills died quickly.
“The whole idea that we have an elected board is just nonsense,” Prentiss Willson, a recently retired attorney with Eversheds Sutherland (US) LLP and member of Bloomberg BNA’s State Tax Advisory Board, told Bloomberg BNA. “Of course it should be jettisoned completely.”
Others, led by the California Taxpayers Association (CalTax), defend the elected board as a structure that provides transparency and democracy to taxpayers.
Much of the renewed attention on the SBOE stems from findings in a recent Department of Finance audit that board members intervene in daily operations of the tax agency, use staff to promote personal events and threaten senior managers if they don’t go along. The members routinely violate budget rules in place since 1999 that bar the agency from shifting employees from revenue-generating work such as auditing to other duties such as public outreach. Employees are often diverted to work on member-driven events with few ties to the agency’s tax mission, according to the audit.
“They are politicians behaving like politicians,” Daniel J. Simmons, professor emeritus at the University of California, Davis School of Law, told Bloomberg BNA. “They have unrestrained authority in a backwater where very few people watch. But they are a large organization with lots of money on the table.”
Although the findings in the audit are fresh, the debate about elected officials overseeing tax administration is almost as old as the board itself. The SBOE was created under the state Constitution in 1879 to equalize property tax assessment practices across the state’s counties.
Lawmakers handed the board the responsibility of adjudicating disputes between taxpayers and the state in 1929, when they enacted the bank and corporation franchise tax and created a separate office of the franchise tax commissioner. The Legislature has also given the SBOE authority to issue regulations and administer various taxes and fees since then.
In 1929, the first of many state commissions and panels recommended abolishing the SBOE. Calling the state tax system at the time “fundamentally flawed,” the California Tax Commission said the SBOE should be replaced with a nonpartisan, three-member tax commission appointed by the governor to administer the state tax system.
Changes adopted in 1928 left the SBOE “without any function of importance,” the 1929 report said. “There are important functions which should be assigned to a properly constituted state body, but these functions may not be confidently entrusted to a politically elected body.”
The Legislature and governor have the authority to act on a broad range of options to change the SBOE in 2017, from imposing more separation between board members and agency staff to shifting all tax administration to a new department separate from the elected board or asking voters to approve a constitutional amendment to abolish the board. They could also choose to keep it the way it is.
The Legislative Analyst’s Office, a nonpartisan fiscal and policy adviser to the Legislature, summarized options for lawmakers in an April 20 report.
“You get one shot to do it. This is it,” Wolk said. “I certainly think they have the ammunition.”
Wolk, Willson and Simmons are each mostly retired and were among the few people contacted by Bloomberg BNA in recent weeks who would speak on the record about the options before the Legislature.
Several active attorneys and accountants who represent clients in proceedings such as audits and tax appeals declined to comment because they don’t want to harm their relationships with board members or their clients. They all, however, expressed frustration with an increasing political tone in day-to-day operations of the board.
“This just tells you that the adjudication system is broken,” Simmons said. “That they don’t want to harm relations with their clients or the members is again evidence of the problems of having an elected tax board.”
Any changes must balance the government’s need for revenue with the taxpayers’ need to be treated fairly, Eric Miethke, an attorney with Nielsen, Merksamer, Parrinello, Gross & Leoni LLP in Sacramento, told Bloomberg BNA May 5.
“We are long overdue for a serious, dispassionate discussion about tax administration in California—not one about revenue loss or gain, or a surrogate turf war between professions, or one controlled by people with personal axes to grind one way or the other,” Miethke said.
Three current board members have described their vision for the SBOE to Brown and lawmakers since the audit came out March 30, saying they should keep the elected board but make various changes to it.
However, Simmons and Garland Allen, a state and local tax attorney who advocates for states to enact all or part of the American Bar Association’s Model State Administrative Tax Tribunal Act, told Bloomberg BNA that the members’ proposals would make only modest improvements to the flawed tax administration system.
Allen said none of the members’ ideas contain four key elements of a state tax tribunal the ABA describes in the model act:
State tribunals should have at least one judge who is appointed for 10 years by the governor and confirmed by the state Senate, according to the ABA. The judge or judges should have experience in making the record in a tax case suitable for judicial review.
Richard D. Pomp, the Alva P. Loiselle professor of law at the University of Connecticut Law School, told Bloomberg BNA May 3 he supports the ABA’s model act because it provides fair and unbiased resolution of tax issues.
“I am astounded that a sophisticated state like California has an appeals structure more typical of a third world country than what is befitting the ninth largest economy in the world,” said Pomp, also a member of Bloomberg BNA’s State Tax Advisory Board.
The SBOE is the final step for administrative appeals from taxpayers regarding sales and use tax, more than 30 other special taxes and fees the SBOE administers, and personal and corporate income taxes administered by the Franchise Tax Board.
Current board members aren’t the only ones defending much of the current system. CalTax is asking its members and supporters to sign onto a letter to the governor asking him to preserve the board’s main functions while addressing the misuse of staff and funds identified in the audit. CalTax is a nonpartisan organization that represents corporations, law firms and consulting firms.
The draft letter, obtained by Bloomberg BNA, calls the SBOE’s adjudication of taxpayer appeals an “independent tax appellate body that provides checks and balances to tax audits and collections,” which is fundamental under the state Taxpayer Bill of Rights.
Allen, however, said the concepts CalTax supports conflict with one another, especially the call for an independent tax appellate body that is made up of elected officials.
Betty Williams, chair of the California State Bar Taxation Section, told Bloomberg BNA the 3,000-member section is weighing whether to offer its support for creation of a state tax court.
“This is an issue that we’ve discussed for a long period,” said Williams, managing shareholder at Williams & Associates PC in Sacramento. “We’re investigating if there is momentum to succeed in initiating a tax court.”
Many taxation section members who also practice in the federal area are especially interested in ending the requirement that taxpayers who lose an appeal before the SBOE must pay the tax before they can file a challenge in state trial court, Williams said.
The board’s critics say opposition from those who benefit from the political nature of the current system and the desire among lawmakers to run for seats on the SBOE when term limits end their time in the Legislature have kept the board the way it is.
They said they are skeptical the governor and Legislature will make major changes because stiff opposition remains, but they will continue to push for them.
“I’ve been jousting at this windmill for too many years to believe it’s going to happen,” Simmons said.
“I’d love to have a tax court,” Willson said. “It’s definitely the perfect time to push for it. The irony is that the board is bringing it upon itself.”
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 firstname.lastname@example.org
Text of the audit is at http://src.bna.com/nx6.
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