The State Worker

For 90 years, Californians have tried to kill this tax board. This is why they failed

Tax board boss says his job was threatened

David Gau, executive director of the California Board of Equalization on April 20, 2017 told a Senate budget subcommittee that his job had been threatened, presumably by an elected official. Video courtesy of the California Senate.
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David Gau, executive director of the California Board of Equalization on April 20, 2017 told a Senate budget subcommittee that his job had been threatened, presumably by an elected official. Video courtesy of the California Senate.

A California tax agency called “duplicative” or worse for nearly a century by government reformers had its closest call with destruction when the Terminator came looking for it.

Armed with a 2,500-page report urging a consolidation of government offices, Gov. Arnold Schwarzenegger in 2004 took aim in part at the Board of Equalization with a pitch to merge most of its work with other tax-collecting departments.

He had allies among lawmakers, including then-Assemblywoman Lois Wolk. She carried a bill that year that would have stripped the elected tax board of its mandate as California’s tax court.

Yet 13 years later, the Board of Equalization is still a standalone agency with five elected leaders, 4,700 employees and a $617 million annual budget.

In fact, it manages about 10 more tax and fee programs than it oversaw in Schwarzenegger’s term.

“We thought it was a great idea (to eliminate the tax board). We pushed it,” said Schwarzenegger’s former Finance Department director, Mike Genest.

He added, “The governor didn’t push it very hard. It wasn’t anybody’s priority.”

Today, the Board of Equalization is back on the hot seat. It’s under tight spending controls from Gov. Jerry Brown and lawmakers are calling for investigations to get to the bottom of the messy accounting and lax oversight that a recent audit from the Department of Finance disclosed.

Last year, the agency came under scrutiny after The Bee revealed that it spent $130,000 on designer furniture for the office of one of its members, calling into question its procurement policies.

There’s enough evidence and information to question the existence of the Board of Equalization.

State Sen. Jerry Hill, D-San Mateo

State auditors now are investigating how many of the agency’s employees are related to each other, and its executive director at a Senate hearing last week announced that he’d been threatened with dismissal recently.

We’re in crisis mode,” Board of Equalization Executive Director David Gau said.

Some of the loudest calls for major change this time are coming from its own leaders. State Controller Betty Yee and board member Fiona Ma argue the agency has lost the public’s trust because of accounting failures and what they regard as a bleeding of political activity into its professional workforce.

“I really have seen a change,” said Yee, who joined the board as an appointee to an open seat in 2004. She has served on it since then as an elected member and as controller. “There’s not as clear a delineation of responsibilities between the board and the staff. And seeing the lack of accountability – of all state agencies, a tax board should be the most accountable.”

But if history repeats itself, the Board of Equalization will again outlast the reformers.

“I think nothing will happen, and that’s the history of the board,” said Wolk, a Democrat from Davis who left the Legislature last year as a senator.

She and others who’ve campaigned for years to diminish the agency have found that it resists change because it’s a favored landing spot for termed-out lawmakers, friendly to big business and virtually unknown to most Californians.

It’s so obscure that voters in 1990 elected former state lawmaker Paul Carpenter to the board’s Los Angeles district two months after he was convicted on federal corruption charges. He later spent seven years in prison.

‘A historical accident’

The Board of Equalization is a unique-to-California agency that collects $60 billion a year in taxes and fees. No other state has an elected board overseeing tax collection. Instead, other states tend to have revenue departments reporting to their governors.

California voters enshrined the board in the state Constitution in 1879, when they charged the agency with “equalizing” property tax assessments among different counties. The initiative was meant to counter a perception that wealthy landowners in mining counties had bribed local assessors, driving down their property tax bills.

The agency has a broader portfolio today. It oversees sales and use taxes, marijuana taxes, hazardous waste fees, taxes on jet fuel and more than 30 other state revenue streams.

But it’s not the only California tax-collecting agency. The Franchise Tax Board handles personal income taxes, and the Employment Development Department collects payroll taxes.

“What we have today is really a historical accident,” said Daniel Simmons, a former UC Davis professor of law who has studied the Board of Equalization and argued for its elimination. “We now have this situation where you have at least three tax-collecting agencies and that leads to a lot of administrative overlap. There’s a lot of inefficiencies in California tax administration coming out of that.”

His 2008 paper in the Santa Clara Law Review traced a long history of calls to combine those departments. They began in earnest in 1929, when a state commission called the state’s tax system “fundamentally faulty” and urged the abolishment of the Board of Equalization.

More calls to shrink it followed in the 1940s, ’50s, ’60s and ’90s.

Gov. Pete Wilson in 1994 vetoed the only significant plan to reconfigure the state’s tax-collection departments to pass the Legislature.

That one would have abolished the Franchise Tax Board and swelled the Board of Equalization by giving it authority over personal income tax.

Wilson wanted a plan that would have done the opposite, giving his administration power over the Board of Equalization.

The bill “would centralize all state tax policy, implementation, and administration outside the executive branch of government. This makes no sense,” Wilson wrote in his veto message.

Origin of ‘taxpayer outreach’

For most of its history, the Board of Equalization was a political backwater.

Its members won re-election easily, and many served there for 16 or more years. George Reilly, the record-holder, kept his seat for 44 years until 1982.

The board moved into a different era in the 1980s when two politically ambitious members won elections to it. One was Democrat Conway Collis; the other, Republican Ernest Dronenburg.

You can’t have a situation where tax collectors are soliciting campaign contributions from taxpayers.

The late Board of Equalization member William Bennett in 1985

The Sacramento Bee in 1985 noted that they gave the board “a new look” with constituent services modeled after ones offered by lawmakers. They also courted campaign donations, sometimes from companies that eventually had business at the board.

“If we continue this way, the board ought to be abolished,” one of their colleagues, the late William Bennett, told The Bee at the time. “You can’t have a situation where tax collectors are soliciting campaign contributions from taxpayers.”

Collis and Dronenburg backed a 1989 law that in some ways committed the agency to their style of taxpayer outreach. The so-called “Taxpayer Bill of Rights” includes requirements compelling the agency to develop education programs.

They favored that approach because they found that most of the taxpayers who had conflicts with the board were in trouble because they didn’t understand the law. “It’s not because they’re tax cheats or tax evaders,” Dronenburg said.

Today, those education programs take the form of mailings and events that often feature elected board members in favorable settings. According to a recent audit from the Department of Finance, the board spent at least $3 million on those activities last year.

“I think it’s important that (board members) be accessible with people who are struggling with trying to understand different aspects of the tax system,” Collis said.

He sounded surprised when a reporter told him the board spent $3 million on outreach in 2016. “What?” he said. He declined to say whether he thought that was too much money.

‘It’s about relationships’

Today, four of the board’s elected members are former lawmakers. They’re two Republicans and two Democrats elected by districts that are considered safe seats for the parties. The fifth spot is reserved for the state controller.

Close ties to the Legislature are among the reasons that some advocates for change at the Board of Equalization are skeptical that it will happen.

“The parties like having those five partisan slots with their big salaries and their huge amounts of power,” said Genest, Schwarzenegger’s finance director.

Each member earns a $137,000 salary and gets to hire 12 staff members. The recent Department of Finance audit suggests some elected members have found ways to swell those figures by “redirecting” civil servants to their own pet projects.

The board holds monthly meetings in public, but it also works behind the scenes to resolve complaints from taxpayers.

Supporters of the system say it gives small-business owners and other taxpayers a chance to get a hearing if they’re mistreated by tax collectors. They can reach out to an elected member’s staff and question an audit, for instance.

But critics say it lets powerful interests exert influence away from the public eye.

Simmons’ 2008 study pointed to a well-known case in 2004 when the board determined that movie theater popcorn was not taxable, holding that it was not prepared food if served at room temperature. The 2-1 decision reversed a previous vote by the board and benefited Century Theaters.

The former law professor said that example illustrates the advantages savvy businesses can tally for themselves if they know how to appeal to the tax board.

“You get a lopsided tax structure that is adverse to the interests of the state. By the state, I mean every other taxpayer except the ones that get before the BOE,” Simmons said.

The parties like having those five partisan slots with their big salaries and their huge amounts of power.

Mike Genest, a former director of the state Department of Finance.

Aside from the occasional effort to scrap the Board of Equalization entirely, the agency also has avoided some smaller scale reforms recently.

Last year, for instance, Sen. Jerry Hill, D-San Mateo, submitted a campaign finance bill that would have blocked Board of Equalization members from accepting donations of any size from businesses that appear before their agency.

It was a response to a Los Angeles Times story describing bundled $249 donations to board members Jerome Horton and George Runner. Each individual contribution was $1 below the cap for Board of Equalization members, but collectively they represented thousands of dollars from a single company.

Hill’s bill cleared the Senate but died in the Assembly.

“I believe it was the political pressure from board members” that killed the bill, Hill said. Horton “would testify, and sometimes in politics it’s about relationships.”

This year, Hill thinks a similar bill would face better chances. Between the audit, Brown’s sanctions and the calls for change from Ma and Yee, Hill says lawmakers likely would be more open to reorganizing the state’s tax-collecting agencies.

“I think they would have to,” he said. “There’s enough evidence and information to question the existence of the Board of Equalization.”

Adam Ashton: 916-321-1063, @Adam_Ashton. Sign up for state worker news alerts at sacbee.com/newsletters.

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