California's Tax Structure:
Governor Proposes Merging BOE and FTB Into 'Department of Revenue' Headed by Political Appointee

Newly released details of the governor's plan to merge some functions of the state's tax agencies describe a system in which the Franchise Tax Board and major portions of the State Board of Equalization and Economic Development Department would be combined into a new "Department of Revenue," overseen by a gubernatorial appointee.

Under the plan, which is very different from a consolidation plan included in the California Performance Review, the "secretary of revenue" would be a Cabinet-level appointee who would serve at the governor's pleasure, and would be subject to confirmation by the state Senate.

The plan calls for the retention of all current employees of the three existing departments.

Details obtained by Cal-Tax indicate that the governor's plan would:

·         Text Box: Cal-Tax Public Policy Concerns • Taxation is the most sensitive contact point between citizens and their government, as the founding of the United States will attest. There is a built-in conflict of interest to have the budget and tax functions under the same roof. The tax function must be administered by elected officials, independent of the budget, to ensure taxpayers that the tax laws are being implemented fairly as written, and are not manipulated to generate revenue for the budget. • Currently, the FTB and BOE take actions in public, with public input. This transparency would be lost if tax decisions could simply be taken behind the secretary of revenue's closed doors. • Putting tax agency power in the hands of a cabinet official would impede the Legislature's ability to get technical assistance on tax measures. If the governor opposed a bill, his or her appointee would be less likely to provide data that could be used to support it. • Voters recently sent a message that they support austerity. Unlike many of the governor's recent proposals to scale back government to save money, this plan would increase the cost of administering taxes by requiring new construction and many other costs associated with creating a new state agency. In this plan, the merger of three agencies is not slated to result in any personnel savings in any area – not even management, public relations or other areas that will be overstaffed if employees from all three existing agencies are kept on board. • In 2005, the legislative analyst concluded that consolidating just the remittance, cashiering and mail-processing functions of the FTB and BOE would produce minor savings, but "these savings would likely be offset many times over by costs of re-engineering existing software to ensure compatibility, purchasing new or renovating existing capital equipment" and producing new remittance forms. Eliminate the three-member FTB, and transfer all 5,200 current FTB positions and approximately $557 million to the new Department of Revenue.

·         Transfer the tax-collection functions of the Employment Development Department to the new department, along with approximately 1,540 personnel and $153 million in funding.

·         Transfer to the new department all elements of the BOE – along with the associated 4,000 positions and $422 million in funding – except for the property tax-related functions and the board's tax appeal functions. The BOE would retain approximately 200 positions and $22 million for these remaining purposes.

The merger would begin to take effect January 1, 2010, and the Department of Revenue would be funded at that time, but the governor's plan indicates that because it would take time for all the changes to be made, the new department likely would contract back with the BOE and EDD to perform some operations that cannot be transferred quickly.

As part of the deal, the new department would be headquartered on the same grounds as the current FTB world headquarters on Butterfield Way. The plan indicates that a "large new building" would be constructed for the department. In addition, the new entity would take responsibility as the tenant of the troubled BOE headquarters building in downtown Sacramento. Staff would be moved out, and the building would be repaired and prepared to be sold or transferred to other state tenants.

A description of the plan says cost savings could arise from consolidating payment processing, replacing computer systems at the FTB and BOE, consolidating taxpayer records and identifications, and consolidating 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."

On June 3, BOE Chair Betty Yee provided a written statement to the Joint Budget Conference Committee, indicating that she does not support the governor's approach, but would support consolidating services on a smaller scale, with no upfront costs to the taxpayers.

Cal-TaxReports, June 8, 2009

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