California Tax Reform Association
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BOE Reforms Are a Great Step Forward: A Little More Work Is Needed

by Lenny Goldberg

The dismantling of the Board of Equalization is a major step forward for tax policy in California. It was one of those obscure steps taken in government that is only appreciated by a few public officials and policy wonks, in this case those few who seek good tax policy and are not narrowly beholden to special interests. 

It should be appreciated more widely. After yet another scandal of mismanagement and corruption at the Board was exposed, the business clientele of the BOE were pushing in the legislature for the usual minor cosmetic changes. With the leadership of Controller Betty Yee — who knows the Board from the inside — major input from the Governor’s office, and strong leadership and staff support in the legislature, a serendipitous moment brought true structural change, an infrequent occurrence in government policy-making. 

What was Wrong at the BOE? 

It never made sense as an agency where the same politicians, most often termed-out legislators, administered, adjudicated and regulated all at once. It failed in nearly all its functions. Instead of straightforward administration of the sales tax and fee programs, the elected Board members ran through numerous executive directors, meddled in staff and assignments, and used staff for their own purposes, not for collecting taxes. In judging tax cases, it was a quasi-court that was lobbied by one side, followed little judicial procedure and precedent, made bad decisions which lost many millions in revenue, and could not even be challenged when unlawful decisions lost revenue for the state. As a regulator, it frequently gave out benefits to special interests who lobbied it heavily. 

It was manipulated by an inside group of lawyers and accounting firms such as KPMG, all representing business interests, which made political contributions to the BOE members directly and indirectly. The adjudicatory process was appalling even to business and tax attorneys from outside California who were not in on the game and saw the process as violative of the judicial norms which prevail in much of the country. 

The reform reduces the role of the Board of Equalization to its required constitutional role, mostly overseeing the property tax (hence the name “Equalization”). The irony of this role is that the property tax, in the light of Proposition 13, is inherently unequal, and the work of the Board is limited to advice and rules for assessors and assessment of utility and telecommunications property, industries which have always been “active” at the Board and still will be. 

New Departments 

A new department of tax administration will collect the sales tax and myriad environmental and regulatory fees under an administrator appointed by the Governor, no longer by a hydra-headed group of former legislators. Tax collection should never be politicized, and in this system it will not be. The current staff of the BOE which is dedicated to efficiently and accurately collecting taxes will stay in place, with consistent direction and accountable administration. 

The judicial reform is the most significant. For a number of years, CTRA and other allies (mostly law professors and the bar) had pushed legislation for an independent tax court. This reform does that to an extent — it provides for tax adjudication by expert administrative law judges who will be well versed in deciding matters of tax practice. Small claims will be able to be dealt with expeditiously, fairly and at no cost to the taxpayer. Larger cases will get full evidentiary hearings with attorneys, without closed-door lobbying and truncated hearings. 

Clean Up Still Needed 

That said, there is still a major flaw which demands a clean-up effort. In the old system and the new, taxpayers who do not like the decisions can appeal for a new trial (trial de novo) to Superior Court. For the state, the BOE was the final judge of personal income and corporation tax cases brought against the Franchise Tax Board and no appeals could be made to the court, which meant that decisions that were bad law against the FTB had to stand. As one recent example among many, the BOE recently extended the ability of real estate investors to use like-kind exchanges in what is arguably direct contravention of the law, but the state could not appeal it, a potential giveaway of many millions to the wealthy. 

This one-sided system, a historical anomaly, is perpetuated in the reform, with no justification. From a purely legal perspective, administrative law judges cannot establish precedent of law without allowing challenge in court — that’s just separation of powers. The executive can make adjudicatory decisions, but the courts are the final arbiter of the law. To establish precedent, both sides must be able to seek a court decision on the law and its interpretations, which are often complex in tax law. 

Business has argued that the FTB has unlimited resources that could overwhelm the taxpayer in a trial de novo. With an experienced tax court examining the evidence, there’s no reason for a new trial on the evidence; what is needed is the right of appeal on the law directly to the Court of Appeal. To respond to the specious argument that the FTB will appeal excessively, the Attorney General might otherwise review the case and decide whether an appeal on the law is appropriate. Hopefully, this is a clean-up matter: no trial de novo, direct appeal to the appellate level provides the necessary separation of judicial and executive functions. 

So, kudos to the parties involved, particularly those staffers and elected officials who for years have known how bad the Board of Equalization actually has been. Now, after a little legal clean-up, California’s tax system will be fully functional for the first time in at least a generation. 

iter of the law. To establish precedent, both sides must be able to seek a court decision on the law and its interpretations, which are often complex in tax law. 

Business has argued that the FTB has unlimited resources that could overwhelm the taxpayer in a trial de novo. With an experienced tax court examining the evidence, there’s no reason for a new trial on the evidence; what is needed is the right of appeal on the law directly to the Court of Appeal. To respond to the specious argument that the FTB will appeal excessively, the Attorney General might otherwise review the case and decide whether an appeal on the law is appropriate. Hopefully, this is a clean-up matter: no trial de novo, direct appeal to the appellate level provides the necessary separation of judicial and executive functions. 

So, kudos to the parties involved, particularly those staffers and elected officials who for years have known how bad the Board of Equalization actually has been. Now, after a little legal clean-up, California’s tax system will be fully functional for the first time in at least a generation. 

Frank Polito