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The California State Board of Equalization has been a fixture since 1870, and has been the subject of recent controversy. It's composed of four elected members and the State Controller. It administers the state sales and use tax, and 30 other special taxes and fees. It equalizes property tax valuations, adjudicates tax disputes, and issues regulations. In this article, Daniel L. Simmons, Professor Emeritus at the University of California Davis School of Law, discusses the Board's history and the calls for modernization of tax administration.
By Daniel L. Simmons
Daniel L. Simmons is an emeritus professor of law at the University of California Davis, where he has been on the faculty since 1976 teaching federal income tax, corporate tax and partnership tax. He is a co-author of casebooks on Federal Income Taxation, Federal Income Taxation of Business Organizations, Federal Income Taxation of Corporations, and Federal Income Taxation of Partnerships and S Corporations, as well as numerous articles.
A recent audit initiated by State Controller and former elected Board member of the State Board of Equalization describes misuse of staff for political and related activities, and misdirection of some State tax revenue. Governor Jerry Brown and State legislators have called for reform of the Board and consolidation of California's tax collection enterprise. Whether the reform will involve major surgery or palliative care is not clear. The current system is supported by significant entrenched interests.
Going back to 1929, virtually every special commission and legislative study recommended that California's tax administration be consolidated into an agency or department responsible to the Governor. A 1955 legislative committee described California tax collection saying:
California's present revenue administration structure is characterized by overlapping duplication, financial waste, and diffusion of activities and responsibilities. It is a hodgepodge of boards and elective and appointive officials and is not truly responsible to the Governor, the Legislature, or the people. Such adequacy of tax administration as we have in California is in spite of, rather than because of “organization.”
(Subcomm. of the Assemb. Interim Comm. On Gov't Org., The Need for a Department of Revenue in California (Feb. 8, 1955).) The same can be said sixty-two years later.
In the opening paragraph of a 2008 article on California tax collection, I wrote:
The tax collection structure in California is a duplicative aggregation of competing agencies that have evolved from California's original dependence on property taxes as the base for state support. In addition, California's primitive tax adjudication network leaves taxpayers without guidance with respect to interpretation of the State's tax provisions. Indeed, the resolution of tax disputes may depend more on the political vision of short-term elected officials and ex party influence of campaign supporters than on findings of fact and application of law to the facts. Further, application of the law is constrained by the complete absence of precedential guidance in the form of written opinions in past cases. Even in the face of powerful political interests in the status quo, it is time for California's government to take a hard look at reform.
(California Tax Collection: Time for Reform, 48 Santa Clara L.Rev. 279 (2008).) Still true!
The State Board of Equalization was created by statute in 1870, and enshrined in the State Constitution in 1879, to address uneven distribution of property and poll taxes that were assessed by local elected assessors and which imposed a greater tax burden on California grazing counties than the mining counties. The 1879 Constitution charged the Board to equalize valuation of property in the counties (a function virtually obsolete after 1978 enactment of Proposition 13 limiting the appraised value of property to 1975-76 levels unless sold or newly constructed). (Cal. Const. of 1879, art. XIII, §10, Cal. Const., art. XIII, §14 (2017).) The Board consists of four members elected from districts of equal population plus the elected State Controller as an ex officio member. The Controller is usually represented at the Board by a deputy. Each of the four elected members represents districts larger than almost any elected official in the United States save statewide elected office holders, some Senators, and the President. Most voters in these huge districts undoubtedly have little idea of the function of the Board of Equalization.
When California adopted a corporate income tax in 1929, the State Controller and the Board of Equalization both lobbied for the authority to administer the new tax. A legislative compromise created the California Franchise Tax Commissioner, appointed by a committee consisting of the State Controller, the Chair of the Board of Equalization and the Governor's Director of Finance, to administer the new tax. Appeals from tax assessments were made to the Board of Equalization. The personal income tax enacted in 1935 follows the same pattern. In 1948, following a legislative investigation that revealed a pattern of “gross inefficiency and maladministration,” the Legislature eliminated the position of Franchise Tax Commissioner (a civil service protected post) and transferred administration of the corporate franchise tax and the personal income tax to the current Franchise Tax Board, which consists of the former appointing committee.
A. Allen Post, then the Legislative Analyst, said in 1965 testimony to a legislative committee:
I would make the case that it would be beneficial to the public to be able to go to one tax agency, and to know that you could get your tax business done there, rather than having the present complex decision of knowing whether to go with respect to one tax to the Controller, another to the Board of Equalization and then to another agency, and so forth. This is just bad business from the standpoint of the public and the public's time is wasted by the present system and there's no doubt about it.
(Assemb. Interim Comm. on Gov't Org., California's Tax Administration: The Need for a Central Revenue Department, 10 (1965).) As the title of its report suggests, the committee once again recommended establishment of a Department of Revenue with responsibility for the statutory state collection functions exercised by the State Controller, the Board of Equalization and the Franchise Tax Board. Notwithstanding similar consistent recommendations dating back 88 years, the Legislature has not found the will to act.
The absence of an independent tribunal to adjudicate tax disputes is the second and more troublesome flaw in California tax administration. Appeal to the Board of Equalization is the only pre-payment avenue available to contest tax assessments by the Franchise Tax Board or the Board of Equalization itself. Board members are elected politicians lacking particular expertise in tax matters and are not necessarily adept at the rigors of finding facts from disputed evidence and the application of law to those facts. Hearings are conducted in a committee meeting like atmosphere and decisions are rarely documented with opinions disclosing the findings of fact and interpretation of law. The absence of an interpretative body of law makes it impossible for taxpayers and investors to anticipate how the tax law will be applied, and thereby inhibits investment planning. Indeed, Board members as elected officials are as likely to base decisions in contested cases on political and policy views as on an interpretation of the law as enacted. The nature of decisions varies with each four year election cycle. In her 2004 testimony to the California Performance Review Commission, former Assembly Member (later Senator) Lois Wolk stated that:
The members of the Board of Equalization are politicians who campaign for election every four years. They need to raise millions of dollars in campaign contributions. Unfortunately, significant campaign contributions have come from entities who appear before the Board … Frankly, it's disgusting and an insult to honest taxpayers who have to carry more than their fair share because others are better connected or because decision were made based on politics and not tax law.
California taxpayers deserve assurance that the tax law as enacted by the Legislature will be interpreted and applied fairly and consistently. Multiple commentators including individual tax practitioners, some California legislators, the 2003 California Commission on Tax Policy in the New Economy, and the California State Bar Tax Section, have advocated the creation of an independent panel of administrative law judges with tax expertise who are appointed by the Governor for substantial terms and confirmed by the Legislature. Tax cases would be heard in a trial de novo with decisions based on relevant evidence and disclosed in a written opinion with a statement of the facts found and the applicable law. Decisions would be subject to appeal to a California Appellate Court by the losing party, either the taxpayer or the assessing agency. This tax court structure would not supplant the existing alternative route for taxpayer adjudication by payment of tax as assessed and filing a suit for refund in the California Superior Court.
The spotlight currently shining on the Board of Equalization offers an opportunity for the Governor and the Legislature to modernize California tax administration. Consolidation of tax administration into a department of revenue, and the creation of an independent tax court will improve California's tax administration to the benefit of all citizens of the State and enhance California's business climate.
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