BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 1554 HEARING: 4/25/12
AUTHOR: Correa FISCAL: Yes
VERSION: 4/19/12 TAX LEVY: No
CONSULTANT: Grinnell
GOVERNMENT REORGANIZATION OF TAX FUNCTIONS
Abolishes FTB, transfer its and EDD's tax collection
functions to BOE.
Background and Existing Law
The California Constitution establishes the Board of
Equalization (BOE) as a five-member board composed of four
members elected by each district plus the State Controller.
BOE 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. Currently, BOE administers sales and
use taxes, excise taxes, special taxes, and the state's fee
programs. Retailers collect sales taxes from customers
when they purchase tangible personal property, and remit
those taxes quarterly to BOE. Only the BOE's property tax
duties are enshrined in the Constitution; all of its other
powers are statutory.
State law requires employers who pay employees
California-sourced income to withhold expected taxes.
Businesses with one or more employees in the current or
preceding taxable year and who pays wages in excess of $100
per quarter must register with the Employment Development
Department (EDD). Employers deposit personal income tax
withholding by mail or electronically with EDD, along with
amounts for Unemployment Insurance (UI), Employment
Training Taxes, and State Disability Insurance (SDI).
Federal schedules determine when employers make Personal
Income Tax and SDI payments, while UI and ETT payments are
made quarterly. Each quarter, the taxpayer files a form to
reconcile these deposits with actual taxes due.
The Franchise Tax Board (FTB) is a three-person board
comprised of the State Controller, Director of the
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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. FTB may issue forms necessary to administer the
taxes. Employees and others receiving payments reconcile
amounts previously withheld with actual tax due when filing
their annual tax returns with FTB.
Proposed Law
Senate Bill 1554 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, 2014. The
measure also places the employment tax functions of the EDD
in BOE, and similarly replaces BOE successor to EDD in any
action related to tax on January 1, 2014.
The bill additionally provides that BOE substitutes for FTB
and EDD 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.
The measure also 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 1554 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, 2014 the bill provides that unencumbered balances of
money from the other two entities shall be available to
BOE. On that date, the other two entities shall transfer
all relevant books, documents, records, and property to
BOE.
State Revenue Impact
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'
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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 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
1. Purpose of the bill . California has multiple tax
collection and administrative agencies, including, but not
limited to, the State Board of Equalization (BOE),
Franchise Tax Board (FTB) and Employment Development
Department (EDD).
Having multiple tax agencies can be disorganized for tax
collection purposes and confusing to taxpayers.
California's tax collection process is inefficient and
inconsistent, with agencies using incompatible systems and
failing to communicate well with one another. SB 1554
would eliminate the Franchise Tax Board, transferring its
powers and duties to the Board of Equalization. The measure
would also transfer any tax administration functions
currently performed by the Employment Development
Department, to the Board of Equalization. Having one state
tax agency would improve tax collection and administration
in California by making the process more efficient,
consistent and simpler for taxpayers.
The Board of Equalization is the ideal agency to lead
efforts to improve California's tax agency structure. As
an elected body, Board of Equalization members must be
responsive to, and appropriately address the needs of their
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constituencies.
2. Better or different ? The Franchise Tax Board is widely
considered to be one of the world's premier revenue
collection agencies, and a model for statewide
bureaucracies. FTB collects civil judgments on behalf of
state agencies, as well as criminal restitution ordered by
courts. When the state agency initially designated to
collect child support failed, the Legislature placed the
responsibility with FTB, which promptly deployed a highly
successful system before turning it over to the Department
of Child Support Services. FTB was one of the first state
revenue agencies to implement combined reporting on tax
returns, and won major tax cases validating the method
before the United States Supreme Court, including Container
Corp. of America v. Franchise Tax Board., 463 U.S. 159, and
Barclay's Bank PLC v. Franchise Tax Board, 512 U.S. 298,
upholding the mandatory use of worldwide combined
reporting, despite not having the statutory authority to
appeal for a trial de novo review of BOE decisions in favor
of the taxpayer. The BOE has been the subject of criticism
regarding the tax appeals process (see Comment #3). FTB
consistently delivers information technology and tax gap
proposals both on time and on budget, including the two
voluntary compliance initiatives for abusive tax shelters
which exceeded revenue estimates. The Committee may wish
to consider the wisdom of eliminating the agency in state
government with arguably the best track record.
3. One of a kind . BOE is the nation's only elected tax
appeals board. As such, they have been subject to
criticism that its tax appeal decisions are politicized and
favorable to affluent taxpayers. UC Professor Dan Simmons
describes this conflict in his article for the Santa Clara
Law Review, "California Tax Collection: Time for Reform:"
"In the context of resolving disputes between
taxpayers and the tax collector, the elective nature
of the Board of Equalization causes an inherent
structural conflict. One can easily imagine that a
campaign slogan for an elected tax collector would be,
"Elect me and I will not collect taxes from you (even
if those taxes are due under the law)." One member
lists as an accomplishment of his tenure on the Board
the fact that he "is responsible for increasing the
percentage of relief received by California taxpayers
before the Board of Equalization." While that may be
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an appropriate position for an elected policy maker,
it illustrates the inherent conflict between the
executive function of the Board of Equalization, which
is to supervise the collection of numerous taxes (and
its concurrent role in developing tax policy and
making recommendations to the Legislature), and a
judicial function that involves the application of
existing law to the facts of a particular case.
On the one hand, the job of the tax collection agency
is to protect the State's revenue by collecting taxes
that are due under the laws enacted by the legislature
and signed by the Governor. An individual could
campaign for the Board of Equalization on a position
that big corporations and other big business, along
with wealthy individuals, don't pay enough taxes.
Another individual may campaign for the Board on the
premise that taxes are bad for the California economy
because they stifle investment. As elected officials,
the members of the Board of Equalization have a
legitimate policy role in the structure of the tax
system that may be influenced by these varying
positions. The overall position of the Board of
Equalization could vary with each election cycle as
the philosophy of the majority changes with new
membership. "
Laura Mahoney with Bureau of National Affairs, now held by
Bloomberg News, found evidence of political influence on
tax appeals when she showed a link between contributions to
elected board members and tax appeal decisions, in her
award-winning August, 2010 work, "Campaign Contributions
and the BOE: A Special Report" stated among other findings:
In the cases with $250 or less tied to them, the
taxpayers won 30 percent of the time. In cases with
between $250 and $16,000, the winning percentage rose
to 53 percent. At the level of $16,000 to $50,000, the
success rate was 75 percent. For cases where
contributions were between $50,000 and $137,000-the
top level-the success rate was 88 percent. One firm,
PricewaterhouseCoopers, was the most active
contributor. The accounting firm represented taxpayers
in 25 cases-36 percent-of the 70 examined by BNA.
Public records show the firm, its clients, and client
employees made 46 percent of the total contributions
directly tied to specific firms and taxpayers. PwC's
clients accounted for 64 percent of the
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$146,761 in contributions made by taxpayers themselves
directly to board members. PwC clients accounted for
67 percent of the $178,811 in contributions from
taxpayers to board members, either directly or through
PACs. PwC contributed more per case than others-an
average of $12,714 compared to the average by other
firms of $8,213. PwC, therefore, contributed 55
percent more per case than other firms. PwC won its
cases 88 percent of the time, compared to an average
of 43 percent for the 21 other firms representing
taxpayers in BNA's analysis."
BOE doesn't publish decisions, leaving little to no
guidance for either taxpayers or tax enforcement agencies
on the correctness of tax positions, and allows individuals
and their representatives to directly lobby BOE members,
which is generally barred in judicial or quasi-judicial
settings. Additionally, committee staff has received
reports that BOE has instituted a new policy requiring BOE
legislative staff to report to BOE members all
conversations with staff of the Legislature. The Committee
may wish to consider whether core state revenue collections
responsibilities to an agency subject to considerable
political pressures and a track record of granting
taxpayer's relief is the best way to reorganize tax
functions.
4. Blowing Up Boxes . The Legislature has considered
several tax agency consolidation proposals in recent years,
summarized by the table below. The Legislative Analyst's
Office (LAO) and department analyses have consistently
argued that tax agency and function consolidation will
definitely incur significant immediate costs to implement,
with only possible 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
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consolidation of payment and document processing
functions in favor of steps to increase electronic
processing.
Governor Brown again proposed tax agency consolidation as
part of his 2012-13 Budget. The Governor proposes to
consolidate the activities of the Employment Development
Department (EDD) that relate to tax collection with FTB
activities into a new Department of Revenue (DOR), and
house DOR within the new Government Operations Agency.
However, the Governor did not include this reorganization
in his Governor's Reorganization Plan #2, submitted to the
Little Hoover Commission on March 30th. DOF indicated at a
recent hearing of the Assembly Budget Subcommittee #4 that
it has tasked working groups with developing a specific
proposal. If the Governor seeks to proverbially blow up
the boxes, why should the Committee approve a measure that
moves in the opposite direction, and doesn't produce
budgetary savings? The Committee may wish to consider
holding SB 1326 until it considers the Governor's specific
tax agency consolidation proposal.
5. Ghosts of Consolidations Past . On June 10, 2009, the
Senate Committee on Revenue and Taxation, the predecessor
to this 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.
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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
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
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proposal which I support in concept
6. Ghosts of Consolidations Past, Part II . 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 1554 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.
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
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taxpayer appeals."
7. Come Together . This chart briefly describes seven
options that have been associated with consolidation in the
past. By not including the Department of Insurance, this
measure differs from the last effort, SB 1133 (Runner),
which the predecessor to this Committee, the Committee on
Revenue and Taxation, held on its suspense file in April,
2010.
-------------------------------------------------------------
|Option |Source |Fiscal Impact |Analysis |
| | | | |
|--------------+-----------+-----------------+----------------|
|BOE & FTB |LAO, 1994 |Reduced expenses |LAO argued that |
|merge | |in the long run; |consolidation |
|functions; | |significant |enhanced |
|BOE retains | |initial startup |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 |Constitutio|budgeting |consolidation |
|Revenue. |nal |functions |could enhance |
|Eliminate FTB |Revision |consolidated as |accountability |
|& BOE |Commission.|above. Unknown |and create "one |
|(including | Various |impact from |stop shop" for |
|tax appeal |Bills<1> |removing tax |taxpayers. |
|functions) | |appeals function |There is lots |
|and combine | |from BOE. |of disagreement |
|with EDD | |Eliminating BOE |on the |
| | |requires a |appropriate |
| | |Constitutional |location for |
-------------------------
<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 1554 -- 1/24/12 -- PageK
| | |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 |Performance|upfront |it is unclear |
|FTB, combine | Review, |consolidation |who serves on |
|with DMV and |2007. |costs. |the commission |
|EDD. |Various | |and whether the |
| |Bills<2> | |BOE or the |
| | | |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 |
-------------------------
<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), SB 274 (Dutton, 2007), SB 1133 (Runner, 2010).
SB 1554 -- 1/24/12 -- PageL
| |Bills<4> | |other states |
| | | |apply a |
| | | |precedent-based |
| | | |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. |
| | | | |
-------------------------------------------------------------
8. Recent Past . The Committee approved SB 1326 (Harman)
at its April 11, 2012 hearing, which requires EDD, FTB, and
BOE to collaborate and focus their current and future
information technology efforts on developing a single
web-based portal that virtually consolidates the agencies
to enable online, self-service access through a single
logon for taxpayer. The measure additionally requires
agencies to consolidate forms, applications, and other
documents to reduce or eliminate the number of multiple
-------------------------
<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).
<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 1554 -- 1/24/12 -- PageM
submissions on the same information by taxpayers upon joint
determination of the agencies that a need exists to improve
cost-effective service to taxpayers, and upon appropriation
from the Legislature.
Support and Opposition (4/19/12)
Support : BOE Member Michelle Steele, Howard Jarvis
Taxpayers' Association.
Opposition :
Uknown.