BILL ANALYSIS                                                                                                                                                                                                    




            SENATE REVENUE & TAXATION COMMITTEE

            Senator Lois Wolk, Chair

                                                     SB 1133 - Runner

                                              As Amended: April 7, 2010

                                                                       

            Hearing: April 14, 2010                         Fiscal: Yes




            SUMMARY:  Abolishes FTB, and Tax Collection Functions of  
                      the Department of Insurance and Employment  
                      Development Department; Consolidates These  
                      Functions into the State Board of Equalization.

            

                 EXISTING LAW (California Constitution and Statute),  
            establishes the BOE as a five-member board composed of four  
            members elected by each district plus the State Controller.  
             BOE administers sales and use taxes, excise taxes, special  
            taxes, and the state's fee programs.  BOE also values  
            property of statewide assessees and sets rules for County  
            Assessors - its initial function was to "equalize"  
            assessment practices between counties when it was created  
            in 1870.  Additionally, BOE adjudicates income tax appeals  
            after exhausting FTB administrative dispute process; if the  
            BOE denies the appeal, the taxpayer may bring an action in  
            state court.  Only the BOE's property tax duties are  
            enshrined in the Constitution; all of its other powers are  
            statutory.  

                 EXISTING LAW creates the Franchise Tax Board (FTB) as  
            a three-person board comprised of the State Controller,  
            Director of the Department of Finance, and Chair of the  
            BOE.  FTB administers the Personal Income Tax and  
            Corporation Tax Law, and collects debts on behalf of state  
            and local agencies.









            


                                                SB 1133 - Runner Page 11
                 EXISTING LAW directs the California Employment  
            Development Department (EDD) to administer the Unemployment  
            Insurance Fund, the Disability Insurance Fund, and the  
            Employment Training Fund.  Employers withhold from  
            employees, and send the proceeds to EDD along with the  
            insurance premiums.  EDD also maintains employment records  
            and implements several federal job-training programs.

                 EXISTING LAW vests with the Department of Insurance  
            (DOI) the responsibility to administer and collect the  
            Gross Premiums Tax.

                 THIS BILL abolishes the FTB, and places its duties and  
            responsibilities with the BOE.  The measure provides that  
            the BOE shall continue as a party to any action in which  
            FTB is currently involved on January 1, 2012.  

                 THIS BILL places the tax administration functions of  
            the EDD and DOI in BOE, and similarly replaces BOE  
            successor to those agencies in any action on January 1,  
            2012.

                 THIS BILL provides that BOE substitutes for FTB, EDD,  
            and DOI in all statutes, laws, rules, or regulations  
            currently in force, vests all powers of those agencies into  
            BOE, and provides that those laws are expressly continued  
            in force.

                 THIS BILL states that the executive director of the  
            BOE, with the approval of the members, shall organize the  
            new responsibilities transferred from the three other  
            agencies as he or she deems necessary for the proper  
            conduct of the consolidated revenue collection,  
            administration, and enforcement actions. The measure also  
            transfers civil service staff from the other entities to  
            BOE.  SB 1133 states that no contract, lease, license, or  
            any other agreement entered into by the other entities  
            shall be void or voidable because of the bill.  On January  
            1, 2012 the bill provides that unencumbered balances of  
            money from the other three entities shall be available to  
            BOE.  On that date, the other three entities shall transfer  
            all relevant books, documents, records, and property to  
            BOE.








            


                                                SB 1133 - Runner Page 11

                 THIS BILL makes findings and declarations regarding  
            the desire of the Legislature to consolidate and streamline  
            the functions currently performed by these entities.

                 THIS BILL requires BOE to report to the Legislature  
            regarding its plan for an progress of BOE's assumption of  
            the duties of the other agencies, including recommendations  
            for legislation to effectively achieve efficiencies of  
            purposes intended by the bill, including  a strategic plan  
            for consolidation of computer systems, telecommunications,  
            and office space of the other agencies, identification of  
            functions readily conducive to consolidation or  
            centralization, and identification of administrative  
            functions because of conflicts or inconsistent  
            administrative processes cannot be readily consolidated  
            into the board.    


            FISCAL EFFECT: 

                 According to the FTB: "Consolidating the FTB with the  
            BOE would provide opportunities to increase efficiency and  
            effectiveness over the long term; however, the magnitude of  
            impact is unknown and would be realized over time.   
            Potential benefits would be offset by the costs associated  
            with merging the organizations and systems, particularly in  
            the short-term.  The magnitude of the benefits and costs  
            would depend on the degree to which the departments'  
            functions and systems are integrated as a result of  
            consolidation.  In addition, working through the  
            organizational, technology, and other issues associated  
            with merging the FTB into the BOE and with the BOE assuming  
            the tax administrative responsibilities of the EDD and the  
            Department of Insurance could divert resources from core  
            revenue-generating functions.

                 An accurate cost analysis of consolidation would  
            require input from the other affected departments to  
            analyze each function and process each such department  
            performs in comparison to functions and processes performed  
            by the BOE.  Accordingly, the department's costs to  
            administer this bill cannot be determined at this time.   








            


                                                SB 1133 - Runner Page 11
            The department will continue to analyze consolidation and  
            its potential fiscal impacts as this bill moves through the  
            legislative process. "




                 According to the BOE, "According to the LAO's January  
            2005 report, a potential long-term savings exists  
            associated with the partial physical consolidation of the  
            agencies' payment and document processing activities by  
            reducing duplication, streamlining staffing, and making  
            more efficient use of existing capital. 

                 However, the LAO points out that these savings are  
            likely to be achievable only through an up-front investment  
            by the state in additional systems that allow the agencies'  
            separate and distinct processes to function in a  
            consolidated fashion. In addition, given that the agencies  
            are at different levels of technological advancement, the  
            LAO report notes that considerable additional investment  
            may be necessary to avoid losing the technological edge  
            that some agencies have achieved in their processing  
            functions. 
                 The amount of these savings could not be determined  
            without an extensive, detailed study.

                 This bill in and of itself would not affect the  
            state's tax revenues.  In general, the transfer of the tax  
            collection and administration responsibilities of the FTB,  
            EDD and CDI to the BOE would not appear to have any effect  
            on the state's revenues.  It is possible, however, that a  
            decrease in revenue could be experienced during the period  
            of conversion as a result of the requirement to spend staff  
            time developing the procedures for the new agency. 




            COMMENTS:

            A.   Purpose of the Bill









            


                                                SB 1133 - Runner Page 11
                 California's tax collection system is currently  
            divided among four different agencies: The Board of  
            Equalization (BOE) administers the State's sales tax,  
            state-assessed property taxes and a variety of excise  
            taxes; the Franchise Tax Board (FTB) collects state income  
            taxes; the Department of Motor Vehicles (DMV) collects  
            motor vehicle-related fee; and the Employment Development  
            Department (EDD) collects employment taxes.

                 FTB administers the Personal Income Tax Law (PITL) and  
            Corporation Tax Law (CTL).  Board members consist of the  
            State Controller, Director of the Department of Finance,  
            and the Chair of the Board of Equalization.  

                 The BOE is an independent constitutional body that is  
            an agency-equivalent and not under the jurisdiction of the  
            Governor. The BOE administers property tax, sales and use  
            tax, the tax appellate program, and special taxes including  
            fuel tax, excise tax, environmental fees, and electronic  
            waste recycling fee.

                 Because California's tax revenue collection  
            agencies-BOE and FTB-perform many of the same functions,  
            they should be should be consolidated into the State Board  
            of Equalization. 







            B.   Come Together

                 This chart briefly describes seven options that have  
            been associated with consolidation in the past.  



             ------------------------------------------------------------ 
            |Option        |Source    |Fiscal Impact    |Analysis        |
            |              |          |                 |                |
            |--------------+----------+-----------------+----------------|








            


                                                SB 1133 - Runner Page 11
            |BOE & FTB     |LAO, 1994 |Reduced expenses |LAO argued that |
            |merge         |          |in the long run; |consolidation   |
            |functions;    |          |significant      |enhanced        |
            |BOE retains   |          |initial start up |accountability  |
            |tax appeal    |          |costs.  Little   |and decreased   |
            |function      |          |Hoover estimated |taxpayer        |
            |              |          |$50 million      |confusion.      |
            |              |          |savings in 1994  |Direction and   |
            |              |          |                 |implementation  |
            |              |          |                 |from the        |
            |              |          |                 |executive       |
            |              |          |                 |branch would be |
            |              |          |                 |clearer.        |
            |              |          |                 |                |
            |--------------+----------+-----------------+----------------|
            |Create        |California|Planning,        |Again,          |
            |Department of |          |budgeting        |consolidation   |
            |Revenue.      |Constituti|functions        |could enhance   |
            |Eliminate FTB |onal      |consolidated as  |accountability  |
            |& BOE         |Revision  |above.  Unknown  |and create "one |
            |(including    |Commission|impact from      |stop shop" for  |
            |tax appeal    |.         |removing tax     |taxpayers.      |
            |functions)    |Various   |appeals function |There is lots   |
            |and combine   |Bills<1>  |from BOE.        |of disagreement |
            |with EDD      |          |Eliminating BOE  |on the          |
            |              |          |requires a       |appropriate     |
            |              |          |Constitutional   |location for    |
            |              |          |amendment.       |the tax appeals |
            |              |          |                 |functions: BOE, |
            |              |          |                 |Department of   |
            |              |          |                 |Revenue or Tax  |
            |              |          |                 |Court.          |
            |              |          |                 |                |
            |--------------+----------+-----------------+----------------|
            |Create        |Governor  |Potentially      |This option     |
            |California    |Wilson,   |reduced expenses |retains the BOE |
            |Tax           |1994.     |in the long run  |and creates a   |
            |Commission:   |California|but large        |Commission but  |
            |Eliminate     |          |upfront          |it is unclear   |
            |FTB, combine  |Performanc|consolidation    |who serves on   |

            ------------------------
            <1> California Constitutional Revision Commission (1996);  
            SB 87/SCA 5 (Kopp, 1994), SB 1727/SCA 9 (Kopp, 1995), SCA  
            39 (Killea, 1996), and AB 2794 (Bowen, 1996).







            


                                                SB 1133 - Runner Page 11
            |with DMV and  |e Review, |costs.           |the commission  |
            |EDD.          |2007.     |                 |and whether the |
            |              |Various   |                 |BOE or the      |
            |              |Bills<2>  |                 |Governor would  |
            |              |          |                 |be the umbrella |
            |              |          |                 |organization.   |
            |              |          |                 |                |
            |--------------+----------+-----------------+----------------|
            |Eliminate FTB |Various   |Same as above;   |This option     |
            |and           |Bills<3>  |unknown impact   |combines the    |
            |consolidate   |          |from eliminating |two largest tax |
            |into BOE or   |          |BOE              |entities in the |
            |eliminate BOE |          |                 |state; one      |
            |and           |          |                 |retains the     |
            |consolidate   |          |                 |Governor as the |
            |into FTB      |          |                 |executive; the  |
            |              |          |                 |other makes BOE |
            |              |          |                 |responsible for |
            |              |          |                 |all taxes in    |
            |              |          |                 |the state.      |
            |              |          |                 |                |
            |--------------+----------+-----------------+----------------|
            |Tax Court     |Various   |Unknown          |Tax Courts in   |
            |              |Bills<4>  |                 |other states    |
            |              |          |                 |apply a         |
            |              |          |                 |precedent-based |
            ------------------------
            <2> Without EDD and DMV: AB1996/ACA 39 (Harris) and SB 1695  
            (Kopp, 1992) created a consolidated Department of Revenue  
             and  a Tax Commission, see also ACA 13 (Leonard, 2001), ACA  
            22 (Dutra, 2003), ACA 14 (DeVore, 2005))
            <3> SB 1052/SCA 22 (Alquist), AB 3338 (McClintock, 1992),  
                   AB 15 

            (Klehs, 1993), AB 2000 (Dutton, 2003), SB 216 (Dutton,  
            2005), and SB 274 (Dutton, 2007).
            <4> SB 1395 (Kopp, Ayala, et al, 1989), SB 23/SCA 25 (Kopp,  
            1991),

            SB 87/SCA 5 (Kopp, 1993) eliminated BOE and FTB and  
            replaced with Department of Revenue and Tax Court, also SB  
            1424 (Burton, 2004) and AB 2472 (Wolk, 2004).









            


                                                SB 1133 - Runner Page 11
            |              |          |                 |objective legal |
            |              |          |                 |forum for       |
            |              |          |                 |adjudicating    |
            |              |          |                 |tax cases;      |
            |              |          |                 |judges selected |
            |              |          |                 |based on tax    |
            |              |          |                 |law expertise.  |
            |              |          |                 |                |
            |--------------+----------+-----------------+----------------|
            |Consolidate   |Various   |CPR estimating a |LAO projects    |
            |cashiering    |Bills<5>  |savings of       |medium to long  |
            |functions     |          |approximately    |term savings    |
            |only          |          |$20 million per  |contingent on   |
            |              |          |year             |initial costs   |
            |              |          |                 |to fund         |
            |              |          |                 |upgrades in the |
            |              |          |                 |new systems.    |
            |              |          |                 |Partial         |
            |              |          |                 |consolidation   |
            |              |          |                 |would have to   |
            |              |          |                 |precede full    |
            |              |          |                 |consolidation   |
            |              |          |                 |of functions.   |
            |              |          |                 |                |
             ------------------------------------------------------------ 

            According to FTB, this table shows the positions and  
            funding for each agency, although the table does not show  
            which employees administer taxes, and would be affected by  
            the bill:



                     --------------------------------------------------- 
                    |           |    Positions     |    Funding, in     |
                    |           |                  |      millions      |
                    |           |                  |                    |
            ------------------------
            <5> LAO (2005) resulting from study required by AB 986  
                 (Horton), 

            California Performance Review (2007); SB 956 (Rosenthal,  
            1997), SB 896 (Speier, 1999) transferred DOI revenue  
            collection functions to BOE.







            


                                                SB 1133 - Runner Page 11
                    |-----------+------------------+--------------------|
                    |BOE        |      4,033       |        $428        |
                    |           |                  |                    |
                    |-----------+------------------+--------------------|
                    |FTB        |      5,336       |        $537        |
                    |           |                  |                    |
                    |-----------+------------------+--------------------|
                    |CDI        |      1,304       |        $227        |
                    |           |                  |                    |
                    |-----------+------------------+--------------------|
                    |EDD        |      8,739       |$111                |
                    |           |                  |                    |
                     --------------------------------------------------- 


            C.   Of Holes and Digging

                 The Legislative Analyst's office, and department  
            analyses have consistently argued that tax agency  
            consolidation will incur significant immediate costs to  
            implement, but could yield long-term savings.  Whether  
            long-term savings will offset those immediate costs is  
            largely unknown.  The LAO summarized the findings of its  
            report released January 10, 2005, as follows:

                 Consolidation of the tax agencies' payment and  
                 documentation processing activities could in the  
                 medium to long term generate some annual cost savings  
                 and interest earnings through elimination of  
                 duplicative functions and increased efficiencies.  The  
                 state, however, would have to incur significant net  
                 costs in the short term to achieve these savings.  In  
                 addition, such benefits are likely to be less than  
                 benefits from increasing electronic processing.  We  
                 therefore recommend that low priority be given to  
                 consolidation of payment and document processing  
                 functions in favor of steps to increase electronic  
                 processing.

                 Tax agency consolidation doesn't eliminate any taxes  
            or tax programs; each one would still be administered, only  
            from a different agency.  It is unclear whether  
            consolidating staff and resources together results in  








            


                                                SB 1133 - Runner Page 11
            tangible savings to the state.  Instead, the initial costs,  
            and the difficulty ensuring that promised savings are  
            realized, could render consolidation more costly than  
            maintaining the current structure.  



            D.   Ghosts of Consolidations Past

              On June 10, 2009, the Committee heard the Department of  
            Finance's proposal for tax agency consolidation.  The  
            Committee Chair's recommendation to the Budget Committee  
            stated:

                   BOE and FTB both need to upgrade key components of  
                 their information technology systems, which each  
                 agency now operates independently.  Additionally, the  
                 situation with the BOE building which houses its  
                 workers is untenable. Any significant future  
                 acquisitions of information technology systems or  
                 physical infrastructure should serve  both  BOE and FTB,  
                 and possibly integrate with EDD systems, which are  
                 currently considered superior.  The Committee  
                 recommends that to the maximum extent practicable, any  
                 acquisitions of property or information technology  
                 should serve both agencies, and BOE should move  
                 employees from the BOE building to the FTB campus,  
                 especially those employees who can help enhance  
                 economies of scale for the revenue system by being  
                 housed together.


                   Additionally, the Department of Motor Vehicles'  
                 (DMV) vehicle license and registration collection  
                 functions should be included in consolidation efforts.  
                  DMV should immediately join the three-agency task  
                 force which currently includes FTB, BOE and EDD.


                   The four agencies, FTB, BOE, EDD and DMV, should  
                 immediately begin working on a technology that  
                 incorporates a single taxpayer identification number.   
                 With a single number, there would be greater  








            


                                                SB 1133 - Runner Page 11
                 information sharing and ultimately greater tax  
                 compliance which will result in increased revenues.


                   The issue of governance is inextricably intertwined  
                 with any consideration of consolidation.  The  
                 Administration's proposal consolidates the tax policy  
                 elements of FTB and BOE away from its existing  
                 governing boards to a Department of Revenue, led by a  
                 Gubernatorial-appointed, Senate-confirmed executive  
                 director.  Shifting tax policy regulatory authority  
                 and oversight under the Governor will inevitably bear  
                 different tax policy results, and presents risks of  
                 executive interference in tax cases.  FTB is widely  
                 considered one of the world's most innovative and  
                 respected revenue-collection agencies in the world;  
                 its record does not merit removing its authority over  
                 tax policy and assigning it to the Governor.  The  
                 Committee recommends deferring discussion over  
                 governance of the tax system because of the  
                 substantive issues involved, and that issues regarding  
                 governance do not have a current, measurable fiscal  
                                         impact.


                   The administration similarly recommends  
                 consolidating audit functions immediately to realize  
                 economies of scale and better deploy existing audit  
                 resources, and claims savings in the 2010-11 fiscal  
                 year.  In concept, the Committee endorses this plan.   
                 For now, the committee recommends that the agencies  
                 create the single taxpayer identification number as  
                 discussed above.


                   As to the major recommendation of the Governor,  
                 which is a new Department of Revenue, the LAO suggests  
                 that consolidating the agencies might accelerate the  
                 process of coordination.  I will work with the LAO and  
                 the Department of Finance to further refine this  
                 proposal which I support in concept










            


                                                SB 1133 - Runner Page 11
            E.   Blowing Up Boxes

              The Department of Finance's Department of Revenue  
            proposal:

                   Statutorily recasts the Franchise Tax Board (FTB)  
                 and portions of the Board of Equalization and the  
                 Employment Development Department as the Department of  
                 Revenue (DOR).

                   Eliminates the three-member Franchise Tax Board,  
                 and vest responsibility for DOR management in the FTB  
                 Executive Director, who will be re-titled the  
                 Secretary of Revenue. The Secretary will have cabinet  
                 status. The DOR Secretary shall be appointed by  
                 Governor and serve at the Governor's pleasure.   
                 Appointment shall be subject to Senate confirmation.  
                 All 5,200 current FTB positions and approximately $557  
                 million would transfer to the new department.


                   Statutorily transfers the tax collection functions  
                 of the Employment Development Department (EDD) to the  
                 DOR, along with approximately 1,540 personnel $153  
                 million  


                   Statutorily transfers all elements of the Board of  
                 Equalization (BOE), except for the property  
                 tax-related functions and Board tax appeal functions,  
                 to the Department of Revenue along with all attendant  
                 personnel and resources. Board of Equalization would  
                 retain approximately 200 positions and $22 million and  
                 the other 4,000 positions and $422 million would  
                 transfer to Department of Revenue. 


                   Initially, designated organizational units and all  
                 incumbent staff transfers to the personnel and  
                 operational control of the new department on January  
                 1, 2010.  Funding transfers to the new department  
                 pursuant to the determination of the Director of  
                 Finance under Sec. 16304.9 of the Government Code. It  








            


                                                SB 1133 - Runner Page 11
                 is expected that the department will contract back  
                 with EDD and BOE for some time to operate the  
                 divisions that are transferring to the Department of  
                 Revenue. 


                   Provides that the Secretary shall report to the  
                 Governor and the Director of Finance on plans to  
                 consolidate the operations of the functions including  
                 facilities, information technology, records, audit and  
                 collection functions, administrative support, payment  
                 processing, and taxpayer relations.  The plans would  
                 be implemented through the budget process, Sec.  
                 16304.9, and legislation. Through this process  
                 appropriate support staff and resources will be  
                 shifted from EDD and BOE to the DOR.


                   It is expected that the DOR takes responsibility as  
                 the tenant for the BOE HQ building as soon as  
                 practicable and that remaining BOE staff will move  
                 out. It is envisioned that the sale, rehabilitation,  
                 transfer to other state tenants, or other disposition  
                 of the building will be incorporated into the plan for  
                 facilities which will likely include a large new  
                 building at the FTB campus.


                   Statutorily requires the BOE and the EDD to render  
                 the DOR all assistance the DOR Director may request in  
                 effectuating the transfer of responsibilities.


                   Opportunities to get savings and avoid costs exists  
                 in consolidating payment processing (a small  
                 consolidation of EDD and BOE processing is included in  
                 the May Revision).replacement of legacy IT systems at  
                 both FTB and BOE, consolidating tax payer records and  
                 identifications (especially businesses), consolidated  
                 business auditing, filing enforcement and collections  
                 activities including the reallocation of resources to  
                 the highest marginal recovery activities throughout  
                 all of the General Fund revenue sources, consolidated  








            


                                                SB 1133 - Runner Page 11
                 administrative services,  consolidated tax payer  
                 contact resources.


                   Leverages strong management at FTB over more tax  
                 collection programs, especially in the IT area.  Now  
                 that the Statewide Child Support System has  
                 effectively been completed and shifted to the  
                 Department of Child Support Enforcement, FTB is ready  
                 to start major IT development projects. BOE is also  
                 looking to start major IT development efforts. 




             -------------------------------------------------------------- 
            |    Preliminary Budget Estimates for Department of Revenue    |
            |                                                              |
            |--------------------------------------------------------------|
            |                    (Dollars in Thousands)                    |
            |                                                              |
             -------------------------------------------------------------- 
            |-------------------------+------+------+------+-------+------|
            |                         |Positi|Person|Operat| Total |Genera|
            |                         | ons  |  al  | ing  | Funds |  l   |
            |                         |      |Servic|Expens|       | Fund |
            |                         |      |  es  |  es  |       |      |
            |                         |      |      |      |       |      |
            |-------------------------+------+------+------+-------+------|
            |Shift to Department of   |      |      |      |       |      |
            |Revenue                  |      |      |      |       |      |
            |                         |      |      |      |       |      |
            |-------------------------+------+------+------+-------+------|
            |Franchise Tax Board      | 5,224|$421,6|$135,8|$557,49|$521,6|
            |                         |      |    49|    45|      4|    32|
            |                         |      |      |      |       |      |
            |-------------------------+------+------+------+-------+------|
            |Board of Equalization    | 3,991|326,00|96,000|422,000|234,00|
            |                         |      |     0|      |       |     0|
            |                         |      |      |      |       |      |
            |-------------------------+------+------+------+-------+------|
            |Employment Development   | 1,539|122,30|30,900|153,200|25,500|
            |                         |      |     0|      |       |      |








            


                                                SB 1133 - Runner Page 11
            |                         |      |      |      |       |      |
            |-------------------------+------+------+------+-------+------|
            |Total                    |10,754|$869,9|$262,7|$1,132,|$781,1|
            |                         |      |    49|    45|    694|    32|
            |                         |      |      |      |       |      |
            |-------------------------+------+------+------+-------+------|
            |                         |      |      |      |       |      |
            |                         |      |      |      |       |      |
            |-------------------------+------+------+------+-------+------|
            |Remain at Board of       |   196|$16,00|$5,900|$21,900|$21,90|
            |Equalization             |      |     0|      |       |     0|
            |                         |      |      |      |       |      |
             ------------------------------------------------------------- 
            |Remain at Employment     | 7,799|$607,4|$236,3|$843,70|$6,800|
            |Development              |      |    00|    00|      0|      |
            |                         |      |      |      |       |      |
            |-------------------------+------+------+------+-------+------|
            |                         |      |      |      |       |      |
            |                         |      |      |      |       |      |
             ------------------------------------------------------------- 
             -------------------------------------------------------------- 
            |      Major Revenues Collected by Department of Revenue       |
            |                                                              |
            |--------------------------------------------------------------|
            |                    (Dollars in Millions)                     |
            |                                                              |
             -------------------------------------------------------------- 
             ------------------------------------------------------------- 
            |Personal Income Tax      |      |      |      |$49,542|$48,83|
            |                         |      |      |      |       |     6|
            |                         |      |      |      |       |      |
             ------------------------------------------------------------- 
            |Corporation Tax          |      |      |      | $8,799|$8,799|
            |                         |      |      |      |       |      |
            |                         |      |      |      |       |      |
             ------------------------------------------------------------- 
            |Sales and Use Tax        |      |      |      |$44,177|$27,58|
            |                         |      |      |      |       |     3|
            |                         |      |      |      |       |      |
             ------------------------------------------------------------- 
            |Fuel Taxes               |      |      |      | $3,145|    $0|
            |                         |      |      |      |       |      |
            |-------------------------+------+------+------+-------+------|








            


                                                SB 1133 - Runner Page 11
            |Cigarette and Tobacco    |      |      |      |   $937|$102  |
            |                         |      |      |      |       |      |
            |                         |      |      |      |       |      |
            |                         |      |      |      |       |      |
             ------------------------------------------------------------- 


            F.   Current Tax Appeals in California

                 Currently in California, a state agency, FTB,  
            administers the personal income tax and corporation tax  
            laws according to the federal and state Constitution and  
            statutes.  Disputes are resolved by the BOE, the only panel  
            of its kind in the country where elected officials  
            determine the merits of tax cases.  The FTB, usually after  
            an audit or an IRS adjustment, issues a notice of proposed  
            assessment ("NPA").  If the taxpayer files a protest with  
            FTB, the NPA does not "go final."  If no is protest if  
            filed, the NPA "goes final" and collection commences.  The  
            taxpayer can pay the tax in full and file a claim for  
            refund.  If FTB denies the claim, the taxpayer can appeal  
            the denial to the BOE.  Briefs are filed with the BOE and  
            the case can be heard for about 40 minutes by the full  
            five-member board.  If the taxpayer wins, that's it.  If  
            the taxpayer loses, the taxpayer can file a refund action  
            in Superior Court.

                 If the taxpayer files a protest with FTB, a protest  
            hearing is held.  If the FTB does not decide in favor of  
            the taxpayer, the taxpayer may file an appeal with the BOE.  
             Briefs are filed with the BOE and a 40-minute hearing  
            before the full five-member board can be requested.  If the  
            board decides in favor of the taxpayer, that's it.  If the  
            board decides against the taxpayer, the NPA goes final and  
            collection commences.  The taxpayer may pay the tax in full  
            and file a claim for refund with the FTB.  If FTB denies  
            the claim, the taxpayer may file an appeal of the denial of  
            the claim with the BOE.  The taxpayer has a right to a  
            hearing before the full five-member BOE, but unless  
            something has changed the BOE will not change its position.  
             The taxpayer may then file a refund action in Superior  
            Court









            


                                                SB 1133 - Runner Page 11
                 SB 1133 consolidates FTB into BOE, merging the  
            administrative body and the appellate body into one entity  
            under the direction of elected officials independent of the  
            Governor or the Legislature.  BOE would administer taxes,  
            set regulations, hear appeals, and be the last stop if the  
            state loses upon appeal -  a model quite different from  
            other states and the federal system, where an independent  
            tax court resolves disputes between taxpayers and the IRS  
            on a post-payment basis, and District courts can resolve  
            cases prior to payment.   Taxpayers could argue that they  
            are not being afforded substantive due process rights under  
            the U.S. Constitution because they would be afforded no  
            prepayment appeal to an independent body, which the current  
            system affords taxpayers.  



            G.   Ghosts of Consolidation Past, Part Deux

                 One of the primary issues when considering tax agency  
            consolidations measures is governance, as identified by the  
            Committee in its evaluation of the Governor's proposal.   
            Consolidation may be thought of as a cost-saving measure,  
            but while those impacts are largely unresolved, SB 1133  
            would reshuffle the powers of running the tax system.   
            Consolidating the state's taxing functions powers into BOE  
            will cause tension with the Legislature and the Governor as  
            tax policy values differ as their compositions change as it  
            enacts regulations and resolves appeals.  This issue was  
            cited by Governor Pete Wilson, who vetoed the only effort  
            to consolidate agencies that ever reached the Governor's  
            Desk (AB 15, Klehs, 1993), stating: 

                 "To the Members of the California Assembly:

                 I am returning Assembly Bill No. 15 without my  
                 signature.

                 This bill would abolish the Franchise Tax Board (FTB)  
                 and would provide for the transfer of its powers and  
                 duties to the State Board of Equalization operative  
                 January 1, 1996.









            


                                                SB 1133 - Runner Page 11
                 AB 15 would centralize all state tax policy,  
                 implementation, and administration outside the  
                 executive branch of government. This makes no sense.   
                 Ultimately, the Governor is held accountable for the  
                 operations of state government, including the tax  
                 system, and should be.

                 In contrast, most other state revenue departments are  
                 administered by a director appointed by the Governor,  
                 and confirmed by the state Senate.

                 I support streamlining government and consolidating  
                 the Board of Equalization and the Franchise Tax Board.  
                  AB 15 is not the way to accomplish this purpose.  The  
                 Administration sponsored legislation that would have  
                 created a Department of Revenue within the  
                 Administration.  That approach would avoid the  
                 conflict of interest inherent in AB 15, in which the  
                 Board of Equalization serves as both administrator of  
                 the tax system, as well as the appellate body for  
                 taxpayer appeals."

                 


            Support and Opposition

                 Support:                           Howard Jarvis  
            Taxpayers Association                   



                 Oppose:American Federation of State, County, and  
            Municipal Employees

                        California Tax Reform Association


            ---------------------------------

            Consultant: Colin Grinnell










            


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