Analysis of the 2005-06 Budget Bill
Legislative Analyst's Office
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 district and the State Controller.
The 2005-06 Governor's Budget proposes $365 million in support of BOE operations, of which $209 million is from the 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 $6.3 million from 2004-05 levels and an increase of $1.6 million from the General Fund. The number of personnel-years for the BOE is budgeted to drop slightly from 3,648 to 3,628.
We recommend that the Board of Equalization report at budget hearings regarding the status of efforts to convert existing paper tax filings and manual processing to electronic systems, including the agency's medium- to long-term goals regarding this technology as well as estimates of related savings and costs.
The application of electronic technologies to tax administration has expanded rapidly over the last decade. As we indicated in our January 2005 report, Tax Agency Consolidation: Remittance and Return Processing, the Employment Development Department (EDD) and FTB have increasingly converted to electronic technologies in the filing of tax returns and remittances as well as the processing of this documentation.
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 in the long term. From a tax agency perspective, electronic technologies decrease processing time, reduce storage costs, minimize personnel requirements, improve data accuracy, and facilitate sharing of information for enforcement and compliance purposes.
Processing Costs Are Lower for Electronic Filings. The processing costs associated with electronic returns and remittances are far below those for paper documentation. For example, FTB estimates that 4,800 electronic remittances can be processed for each direct staff hour. For paper submissions, only 65 remittances can be processed for each direct staff hour. At EDD, just over 40 percent of the volume of remittances is by paper, but these remittances consume 80 percent of related staff time. Similarly, paper tax filings represent 50 percent of the total, but use 85 percent of processing-related resources. Additional savings typically occur because the electronic submissions of remittances and returns are more accurate than their paper counterparts.
Electronic Documentation Is Growing. Electronically filed returns and remittances represent a growing component of tax agency processing activities. At FTB, this growth has occurred as a combined result of statutory mandates for tax practitioners as well as a "natural" migration from paper to electronic filing by individual and business taxpayers. The FTB reports that between the 2000 tax year and the 2003 tax year, electronically filed returns expanded from 2.3 million to 3.7 million, or 63 percent. Similarly, electronically filed remittance grew from 0.8 million to 1.2 million, or 47 percent. The department expects 10 percent annual growth in electronic remittances through 2008, and 5 percent to 10 percent annual growth in electronic returns through the same period.
BOE Should Plug Into Electronic Technologies. Although the BOE has made some progress in the electronic technologies and automation area, there are still substantial additional improvements that could be made. While the agency receives about 60 percent of total SUT payments through electronic funds transfer, in terms of the volume of remittances, the proportion is a fairly small share of the total. In addition, electronic tax filings (or submissions that can be scanned and converted to digital form) represent a small share of total tax returns.
As we noted in our January 2005 report, the workload at BOE tends to be largely paper-driven. Submissions of documentation is generally still conducted through paper methods and, as a result, the processing of such submissions tends to be manually intensive. Tabulations are often carried-out by hand, returns are mechanically sorted by tax program, and information is manually keyed. Much of the documentation goes through processing while still in physical—rather than digital—format.
Investing in electronic technologies is likely to have substantial payoff over the medium to long term in terms of budgetary savings, due largely to reduced staffing requirements. In addition, the technology is likely to have significant benefits for coordination and information sharing among the tax agencies for enforcement and compliance purposes. Finally, such a shift will simplify filing requirements and result in reduced costs for taxpayers.
While converting to electronic filing and processing would result in annual savings for the state in the medium to long term, it is also important to note that investing in electronic technologies would require up-front investment by the state. (One potential means of addressing these costs is through alternative procurement, whereby the costs of implementation are "paid" through savings achieved through the project.) Given the complexity of the issues associated with electronic filing and processing, we recommend that BOE report at budget hearings regarding its medium- to long-term goals regarding this technology, including estimates of related savings and costs.
We withhold recommendation on the request for additional funds to administer the Electronic Waste Recycling Fee. The Board of Equalization should report at budget hearings regarding the cost estimates for administering this fee.
To address the growing problem of electronic waste, the Legislature adopted Chapter 526, Statutes of 2003, (SB 20, Sher), which instituted a comprehensive system for the recycling or disposal of certain electronic devices. Subsequent legislation—Chapter 863, Statutes of 2004 (SB 50, Sher)—required BOE to collect the Electronic Waste Recycling Fee. The budget includes an additional $5.7 million (reimbursements and special funds) for the collection of this fee.
In terms of the other special taxes and fees that the BOE collects, the department's proposed budget appears to be on the high side. The exist ing Tire Recycling Fee Program provides a good comparison of costs, since, like the Electronic Waste Recycling Fee, it is collected largely from retailers. For the Tire Recycling Fee Program, the BOE has about 16 positions and collects about $32 million, or one position for every $1.9 million collected. For the Electronic Waste Recycling Fee, the BOE will have 77 positions in order to collect fees of $78 million, or one position for every $1 million collected. Although some start-up costs are expected with such a program, these seem excessive given costs associated with other special fee programs. We recommend that the BOE report at hearings regarding this proposal and provide backup regarding its cost estimates and how these can be distinguished from its program costs for existing programs.