As Part of State Budget Process, Legislature Approves Bill to Dismantle the BOE and Create New Tax Agencies

On June 15, the Legislature’s deadline for sending a budget bill to the governor, the Assembly and Senate approved a $183.2 billion budget appropriations bill and several trailer bills, including one that dismantles the State Board of Equalization and creates an entirely new process for administration and appeals of most taxes.

The main budget bill, AB 97 (Ting), was approved with a 28-10 vote in the Senate and 59-20 vote in the Assembly. Governor Jerry Brown has not announced when he will sign the bill, but has until July 1, the beginning of the new fiscal year.

The Senate analyses prepared for the bill notes that it contains $125.1 billion in general fund spending and projects $127.5 billion in general fund revenue, but does not include the total spending from all special funds. This is the largest budget in California’s history, and spending is likely to climb even higher than $125.1 billion, as the Legislature typically augments the budget near the end of the fiscal year, as it did this week with legislation to appropriate $1.15 billion to augment the 2016-17 budget.

State Board of Equalization Dismantled

For taxpayers, the biggest issue was the hastily crafted, unvetted proposal to strip the BOE of most of its authority, and to put most tax administration and appeals duties under the power of gubernatorial appointees. Although the dismantling of the BOE was not truly a budget issue, it was included in a budget trailer bill, AB 102, to expedite its passage.

Just three days after the bill’s language was unveiled, the measure was approved by the Senate by a vote of 22-13, and by the Assembly with a vote of 52-25. Governor Brown has signaled his intention to sign the bill, which will relieve the BOE of its core statutory functions and establish two brand new tax agencies. The BOE will retain its constitutional duties, including oversight of property taxes and assessment of state-assessed properties.

As of July 1, the BOE no longer will administer sales and use taxes, excise taxes and certain fees. The measure transfers these responsibilities to the newly created Department of Tax and Fee Administration, which will operate under a director appointed by the governor. Effective January 1, 2018, the adjudicatory powers of the BOE for all taxes and fees except for state-assessed property taxes, insurance taxes and alcohol taxes will be transferred to the newly formed Office of Tax Appeals, and panels of administrative law judges – selected by a director appointed by the governor – will be entrusted to hear tax appeals.

In the Assembly, lawmakers speaking against the bill continually emphasized the accessibility and accountability of the current BOE adjudicatory process for small businesses struggling to navigate the tax system.

“This is the one place a business can go in and have some leverage to fight back,” Assemblyman Brian Dahle said.

Assemblywoman Marie Waldron argued that the BOE has vastly improved since her time as a business owner. “When we have various business town halls or community meetings, the BOE comes out and has a table – they’re accessible,” she said.

Republicans and Senator Cathleen Galgiani expressed strong concerns that the overhaul went too far, and questioned why it did not go through a normal policy process.

“I’m concerned about the adjudicatory portion of the board,” Senator Galgiani said. “I’m worried this is happening very quickly.”

Senator John Moorlach accused the Senate of “abusing the process once again through trailer bills.”

Senator Mike McGuire, chair of the Senate’s tax policy committee, argued that the bill received more hearings than most bills. The bill, however, was not heard by Mr. McGuire’s committee, nor by the Assembly’s tax policy committee. The only hearing was in the Senate Budget and Fiscal Review Committee, one day after the language of the measure was made public, where taxpayers’ representatives were afforded just one minute each to voice their concerns.

Main Budget Bill

Assembly Speaker Anthony Rendon described the budget as something “that does things for people, not to people,” and claimed that its provisions “will protect what we’ve gained, and persist in moving forward.”

Republican Assemblyman Jay Obernolte, vice chair of the Assembly Budget Committee, said he couldn’t support the budget, citing the use of revenue outside its designated purpose, and the inclusion of major policies unrelated to the budget. Mr. Obernolte described the last-minute introduction of these policies as an “insult to the members in the chamber.”

Changes to Recall Elections

Although recall elections are not related to the state budget, a “budget trailer bill” making retroactive changes to the recall process was the most hotly debated measure during the budget debate.

The Senate voted 26-11 to approve the recall measure, SB 96, which adds onerous additional requirements, including a delay of 30 business days to allow voters to withdraw signatures from a recall petition, a Department of Finance estimate on the costs of holding a special election, and required 30-day review by legislative budget committees. The Assembly approved the bill with a 52-27 vote.

Republicans screamed foul, since this is seen in the Capitol community as Democratic tampering to impact a recall that already is under way. Senator Jeff Stone described the use of the trailer bill as a “bastardization of the legislative process” intended to protect Senator Josh Newman, who is the subject of a recall due to his deciding vote on the gas tax. The recall campaign recently announced that it has more than half of the needed signatures to put a recall measure before voters, with months left to go before signatures must be submitted.

In addition to changing the rules regarding the recall, which was instituted as part of Governor Hiram Johnson’s package of reforms to empower the people, Democrats added language to the bill to build a state-owned cemetery for veterans in Orange County, and to build additional veteran housing.

Senate Republican Leader Pat Bates accused her Democratic colleagues of using “veterans’ needs and issues as pawns.”

During the Assembly debate, Republican Assemblyman Marc Steinorth attempted to submit several amendments to remove the provisions of SB 96 related to the recall process, and focus just on veterans, but Democrats tabled the amendments.

Tobacco Tax Revenue

Both houses also approved AB 120 (Ting), appropriating some revenue generated by Proposition 56’s tobacco tax increase for purposes not included in the initiative.

Assemblyman Obernolte criticized the measure for deviating from the spending requirements of the initiative as “voters made it clear what they wanted,” but still offered his “reluctant support.”


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