Analysis of the 2007-08 Budget Bill: General Government

Board of Equalization (0860)

The Board of Equalization (BOE) is one of California’s two major tax collection and administration agencies. In terms of its responsibilities, BOE: (1) collects state and local sales and use taxes (SUT) and a variety of business and excise taxes and fees, including those levied on gasoline, diesel fuel, cigarettes, and hazardous waste; (2) is responsible for allocating certain tax proceeds to local jurisdictions; (3) oversees the administration of the property tax by county assessors; and (4) assesses certain utilities and railroad property. The board is also the final administrative appellate body for personal income and corporation taxes, which the Franchise Tax Board (FTB) administers. The BOE is governed by a constitutionally established board—consisting of four members elected by geographic district and the State Controller.

The 2007-08 Governor’s Budget proposes $390 million in support of BOE operations, of which $218 million is General Fund, with most of the remainder consisting of reimbursements from local governments. The proposed level of support represents an overall increase in funding of $6 million from the 2006-07 level and a net increase of $2 million General Fund. The number of personnel-years (PYs) for BOE is budgeted to increase slightly from 3,767 to 3,800.

Position Request Not Justified

We recommend the Legislature reduce the board’s proposed position authority by six personnel years and $230,000 due to reduced workload in the electronic waste recycling program. (Reduce Item 0860-001-3065 by $230,000.)

Background. In 2004, the Legislature passed Chapter 863, Statutes of 2004 (SB 50, Sher), which states that, effective January 1, 2005, a consumer is required to pay an electronic waste recycling fee upon the purchase of a new or refurbished electronic device. The fee serves as a funding source for payment of collectors and recyclers of electronic waste in order to ensure the safe and environmentally sound disposal of these devices. The fee is administered by BOE, and remitted to the California Integrated Waste Management Board. To operate the program, the 2006-07 Budget Act provided BOE $4,904,000 and 72.5 PYs. Of this staffing total, 27.7 were limited-term positions set to expire June 30, 2007.

Governor’s Proposal. The budget proposes to eliminate 21.7 of the 27.7 limited-term positions, but extend for two more years the remaining six positions in order to administer the fee. The administration’s proposal results in a staffing level of 50.8 PYs, a 30 percent reduction from the current year.

Position Request Not Justified. The board is anticipating a significant reduction in the number of accounts (that is, businesses involved with the fee) in the program in 2007-08. Based on our review of available workload information, it appears that the board would not need to extend the six limited-term positions for two more years.

Therefore, we recommend the Legislature reduce the board’s proposed budget by six PYs and $230,000 (Electronic Waste Recovery and Recycling Account).

Revenue Estimate From Enforcement Work Scored Too Low

We recommend the Legislature score an additional $800,000 in General Fund revenues due to various enhancement to the board’s Consumer Use Tax Section proposed by the administration.

Governor’s Proposal. The administration proposes permanent status for six limited-term positions in the Consumer Use Tax Section at a cost of $313,000 ($203,000 General Fund and $110,000 reimbursements) in 2007-08. The administration estimates that the proposal would generate $4.3 million in additional General Fund revenues in the budget year.

Revenue Estimate Is Understated. The administration’s revenue estimate reflects anticipated hiring delays and an estimated six-month training period for the staff to learn their job duties. However, staff for these six positions have already been hired and completed the training period. Thus, the BOE’s estimate for revenues is too low. Based on our review, we recommend the Legislature score an additional $800,000 in General Fund revenues to be generated by the enhancements to the board’s use tax program.

Electronic Filing Should Generate Savings

We: (1) withhold recommendation on the administration’s request for two positions and $1,460,000 ($949,000 General Fund and $511,000 reimbursements) for electronic filing infrastructure enhancements, and (2) recommend that the Board of Equalization report at budget hearings regarding the status of efforts to develop a cost-savings model, together with estimates of medium- and long-term savings and costs associated with increased conversion to electronic systems.

Background. Previously, we have noted that BOE has been converting to electronic technologies in the filing of tax returns and remittances, as well as the processing of these returns. The advantages of shifting to electronic remittances and returns are significant. From the taxpayers’ perspective, using electronic filing can minimize record keeping requirements, increase filing accuracy, and reduce costs. From tax agencies’ perspective, electronic technologies decrease processing time, reduce storage costs, minimize personnel requirements, improve data accuracy, and facilitate sharing of information among the different agencies for enforcement and compliance purposes.

Electronic Processing Results in Savings. From a budgetary perspective, the costs associated with processing electronically filed returns and remittances are a fraction of the costs associated with paper documentation. For example, FTB has reported that about 4,800 electronic remittances are processed per staff hour. By comparison, only 62 paper remittances are processed per staff hour. This cost differential can translate directly into budget savings. In addition to processing savings, additional savings typically occur because the electronic submissions of remittances and returns are more accurate than their paper counterparts, thus requiring less follow-up contact with the taxpayer to correct inaccuracies.

Although BOE has made some progress in the electronic technologies and automation area, there are still substantial additional improvements that could be made. For instance, BOE just recently implemented electronic filing for single-location taxpayers (which account for a small proportion of total SUT liabilities), and has yet to offer electronic filing options for multiple-location taxpayers. Hence, while the agency receives about 60 percent of total SUT payments through electronic funds transfer, electronic tax filings represent only a small share of total tax returns.

Governor’s Proposal. The administration is proposing additional funding and positions that would allow BOE to expand its SUT electronic filling program to include businesses filing multiple returns and others, as well as allow BOE to automate the delinquent prepayment process. To accomplish these goals, the administration requests two positions and $1,460,000 ($949,000 General Fund and $511,000 reimbursements) in 2007-08, and three positions and $431,000 ($280,000 General Fund and $151,000 reimbursements) in 2008-09.

No Savings Estimate Associated With this Proposal. The Governor’s proposal represents stage three of a plan to move the agency and the taxpayers it serves towards a more electronically integrated business model. However, estimates of savings to the state associated with this electronic migration have yet to be quantified.

The administration’s proposal indicates that savings associated with this proposal would be identified upon completion of BOE’s Tax Return Processing Assessment, at which time the department would develop a cost-savings model that could be applied to the tax return processing areas affected by a reduction in paper return filings. The assessment was completed January 5, 2007, and although savings in either the medium- or long-term have yet to be identified, BOE indicates that it has begun work towards developing a cost-savings model.

We withhold recommendation on the administration’s request for electronic filing infrastructure enhancements and recommend that the board report at budget hearings regarding the status of efforts to develop a cost-savings model, together with estimates of medium- and long-term savings and costs associated with increased conversion of existing registrations, tax filings, and manual processing to electronic systems. Without such information, it is difficult to evaluate and track program performance.

Tax Agency Information and Data Exchange

As discussed in the “General Government” cross-cutting issues section earlier, improved information and data exchange among the several state agencies that administer, collect, and enforce California’s taxes would benefit the state. In that section, we summarize the findings of a report we recently prepared on this topic at the request of the Legislature and with inputs from the tax agencies involved. We also recommend that the tax agencies, including BOE, report at budget hearings on what actions they have undertaken or are planning to undertake in conjunction with our report’s findings, and on other specified matters relating to tax-agency information and data exchange.


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