Report 93026 Summary - March 1994

The Board of Equalization's Tax Settlement Program has Achieved the Legislature's Intent

The State Board of Equalization's (board) settlement program is both more efficient than and as effective as the board's other methods of resolving tax disputes. We could not quantify the number of hours the board's staff charged to settlement cases as compared with cases in petition, appeals, board hearing, and litigation; however, we were able to determine that the settlement program generally shortens the lengthy tax dispute process. Specifically, the board's settlement program resolved 94 cases in fiscal year 1992-93 in an average of 9 months as compared with a range of 7 to 46 months on average during the same period in the board's other administrative appeals processes. The settlement program creates a better working relationship between the board and taxpayers when tax disputes arise. The board settlement program also generally sustains taxes at rates comparable to the other processes the board uses to resolve tax disputes. The settlement program achieved a tax-sustained rate of 43 percent during fiscal year 1992-93 as compared with a range of 44 to 51 percent on average in the board's other administrative processes, making it as effective in resolving tax disputes as the other administrative processes.

Through the settlement program, the board resolved tax disputes totaling $41.3 million. Of this amount, the settlement process sustained taxes, penalties, and interest totaling $17.8 million, or 43 percent, of the amounts in dispute. The remaining amount, $23.5 million, was written off by the board. Of the $17.8 million in sustained taxes, penalties, and interest, the board collected $2.4 million as cash, has $1.4 million outstanding on installment payment programs, and had previously collected the remaining $14 million. The $2.4 million of cash collections is the net of tax refunds totaling $4.5 million that resulted from settlements.

The accelerated collections of $2.4 million made cash available earlier for the State's needs, eliminating the possibility that the State would not realize the cash because of an adverse decision against it in petition, appeals, board hearing, litigation, or because of a taxpayer's insolvency. Moreover, the settlement of the 94 cases in fiscal year 1992-93 allows the board to direct its resources to the resolution of other new or existing tax disputes. However, the accelerated collections did not provide an economic benefit to the State resulting from increased interest earnings or decreased interest expense because the interest rate paid by taxpayers on unpaid taxes exceeds both the interest rate earned on the State's investments and the interest paid on the State's borrowings during fiscal year 199293.

Because of the overall positive results, we recommend that the Legislature continue the settlement program at the board with a review scheduled in five years to determine whether the settlement program continues to be more efficient and as effective as the board's other method of resolving tax disputes.