Client Alert

California Tax Reform Should Include Ending Pay-to-Play

10/1/2004

On August 3, 2004, the California Performance Review ("CPR") issued its long awaited report to the public. Among its many recommendations was the creation of a California Tax Commission that would consolidate the functions of California's three taxing agencies: the Employment Development Department (payroll taxes), the Franchise Tax Board (income taxes), and the Board of Equalization (property, sales and use and miscellaneous taxes). The focus of the CPR was on tax collection and revenue generation. Although it remains to be seen how, if at all, this recommendation will be implemented, this is a promising step, and we applaud the Governor.

Unfortunately, the CPR failed to specifically address in its recommendations ending pay-to-play, and Legislative proposals to implement CPR's recommendations are not expected before next year. However, several members of the Legislature have made clear that comprehensive tax reform should include separating the tax appeals and adjudication process from the tax collection process. In the past session, two bills were introduced in the California Legislature that would have accomplished this by creating a prepayment, independent tax adjudication system modeled on the United States Tax Court. These bills died in the Legislature over the summer and it is unclear what may happen down the road.

While the details of those bills were the subject of significant debate, there was no real opposition to the due process concept that was the true inspiration of the legislation: the right to a full trial on a prepayment basis, a right currently provided by many other states. Greg Turner, General Counsel for the California Taxpayer's Association ("Cal-Tax"), which opposed these two bills, stated that Cal-Tax is "very supportive of consolidation" despite the lack of any discussion of ending pay-to-play. Mr. Turner attributes the CPR's lack of discussion of ending pay-to-play to the Governor's inability to enact any reorganization plan that might require a constitutional amendment. Some people argue that because the California Constitution has an anti-injunction provision, ending pay-to-play would require a constitutional amendment. Nonetheless, he added, "Elimination of pay-to-play? You bet we support it."

The goal of the CPR is to make California a fair and efficient place to conduct business. By ending pay-to-play, all taxpayers would be afforded the opportunity to have a full and independent "day in court." Regardless as to the manner, whether it be by constitutional amendment modifying the anti-injunction rules, or by some other means, ending pay-to-play should be a top priority for the business community.

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