Arguing that the agency that collects a third of California’s taxes has lost the public’s trust, state Controller Betty Yee on Friday said lawmakers should strip the embattled Board of Equalization of much of its authority and create a new state department to manage dozens of tax and fee programs.
Yee, the longest-serving member on the Board of Equalization, released her proposal following an audit that found faulty accounting, rising spending on events that have little to do with collecting taxes and a climate of fear among civil servants who worry they’ll lose their jobs if they displease elected officials.
“I look at the board and it’s entrusted with making sure our tax dollars get to the right place, and clearly its falling short in this critical mission,” said Yee, who was elected as one of the board’s four district members in 2006. As controller, a statewide post to which she was elected in 2014, Yee automatically became the fifth member of the board.
Earlier this week, board member Fiona Ma of San Francisco cited the same audit from the Department of Finance when she wrote a letter to Gov. Jerry Brown asking him to appoint a public trustee to manage the Board of Equalization.
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Their proposals could gain momentum in coming weeks with the expected release of several more audits and two budget hearings where lawmakers will have opportunities to dig into the report’s findings. On Wednesday board officials are expected to appear before an Assembly budget subcommittee. On April 20, they head to the Senate.
Sen. Richard Roth, chairman of the Senate’s subcommittee on state administration and general government, pledged to follow up on the audit with his own investigation.
“Californians should have confidence that their hard-earned tax dollars are being invested and managed in a responsible and transparent manner,” Roth said in a written statement. “The issues outlined in the (Finance) audit are deeply troubling, especially given the Board of Equalization’s tax collection and oversight role, and deserve thorough review.”
Yee’s proposal follows a November 2015 audit her office released that showed the Board of Equalization had misallocated $47.8 million in tax revenue. The newest audit reported that the Board of Equalization tried 11 different times to correct its accounting, but still struggled to explain the assumptions it used when it moved revenue among different state funds.
Yee’s plan would restrict the Board of Equalization to the mission Californians approved in 1879 when they voted to create an agency to manage property taxes around the state. She’d also continue the practice of having elected board members hear appeals from taxpayers.
But Yee would cut from the agency its oversight of sales taxes, use taxes and more than 30 other revenue-generating programs that the Legislature has handed to it over the years. She estimated about 80 percent of the agency’s portfolio and staff would move to a different revenue department.
In an interview with The Sacramento Bee, Yee said the latest audit showed that the agency has allowed the misuse of public resources and that its leadership has blurred boundaries between its elected leadership and its professional staff.
“By taking those elements out of the Board of Equalization, the issue of the misuse of resources, will no longer be an issue,” she said.
Her proposal echoes other plans California leaders have put forward to consolidate the state’s three main tax-collecting departments – the Board of Equalization, the Franchise Tax Board and the Employment Development Department. Then-Gov. Arnold Schwarzenegger in 2009 unsuccessfully proposed linking all three of them, and current Board of Equalization member George Runner in the past has advocated a merger of the Board of Equalization with the Franchise Tax Board.
Yee considers a merger to be impractical because it would take time to link two departments that use different technology and have some 9,000 employees between them.
“This is really necessary now to rebuild public trust,” she said.
Since copies of the audit began circulating last week, members of the Board of Equalization have responded in three different ways.
Members Diane Harkey and Jerome Horton have called the audit inaccurate and said they appropriately worked with the agency’s staff to organize outreach events in their districts. The report includes examples of expensive events from their districts that auditors suggest are unrelated to the Board of Equalization’s core mission, including two “connecting women to power” conferences that cost a combined $189,000 last year.
Runner called the report an “opportunity” and said a majority of its elected leaders are serious about changing policies to improve the organization. “Fundamentally, the mission of the Board of Equalization is being accomplished,” he said.
Ma and Yee have lost patience with the agency and believe it needs outside help to compel changes.
“Any time an audit raises findings of this magnitude, it suggest the points of accountability are broken, both externally and internally,” she said.
She’d have to persuade lawmakers and the governor to go through with her proposal. Brown this week sounded reluctant to follow Ma’s suggestion of appointing a public trustee. Michael Shires, a public policy professor at Pepperdine University, said lawmakers may be growing tired of the drumbeats of audits and news reports that have called attention to questionable spending at the agency.
“In an ideal world, they would actually clean their own house. But this agency has a 150-year history of not doing that,” Shires said.