Report 95022 Summary - January 1996

Board of Equalization:

Policies and Cost Assessment Methods for Special Tax Jurisdictions Need Reconsideration


The board:

  • Uses a cost model that reflects a significant policy decision to assess its basic, or infrastructure, costs to others.
  • Passed on $157.5 million of infrastructure costs to STJs and local governments during the past three years.
  • Inappropriately charged the STJs nearly $6.6 million during the past three years.
  • Used questionable estimates of workload to calculate STJ direct costs.
  • Used an allocation method that resulted in nearly $1.7 million in over- and undercharges to STJs.

The Board of Equalization (board) is responsible for administering 21 tax programs that generate a total of more than $30 billion in annual revenue. Among the taxes that the board administers are sales-and-use taxes (sales taxes) which the board administers for the State and for cities and counties, and transactions-and-use taxes (transactions taxes) which the board administers for special tax jurisdictions (STJ). Our review focused on whether the board's charges to STJs for the administration of their tax program were reasonable and equitable. The board uses a cost model comprised of direct costs, shared costs, and central agency costs to calculate assessments for STJs. We describe each of these cost elements in Chapter 1. We noted the following key impacts associated with the board's application of the cost model:

  • The cost model reflects a significant policy decision to allocate the board's basic, or infrastructure, costs of operating its tax administration system to STJs and local governments (cities and counties). From fiscal year 1993-94 through 1995-96, the board passed on nearly 28 percent ($157.5 million) of its infrastructure costs to the STJs and local governments. Of this amount, the board assessed STJs $55.4 million to help pay for infrastructure costs. The board would continue to incur these costs even if it did not administer the taxes for these entities.
  • While the State and local governments appear to be paying for the board's tax administration system to the degree that they benefit from it (i.e., the proportion of revenue they generate is roughly equal to the proportion of costs they pay), the proportion of costs the STJs pay is nearly twice as much as the proportion of revenue they earn. This occurs because the STJs are assessed a large amount of direct costs associated with the unique nature of their transactions taxes as well as a large amount of shared costs while the State and local governments are assessed few direct costs in addition to their portion of shared costs.
  • The application of the cost model results in assessments to the STJs that are regressive in nature. STJs with tax rates of less than 0.5 percent pay a higher proportion of their revenue to the board for administrative costs than do STJs with tax rates of 0.5 percent because it generally costs the same amount to administer a transactions tax with a 0.1 percent rate as one with a 0.5 percent rate.

Notwithstanding the impacts identified above, we noted the following concerns during our review of the costs the board assessed STJs:

  • The board inappropriately charged the STJs for costs associated with its administration of two unrelated statewide sales taxes resulting in the STJs paying nearly $6.6 million in additional charges from fiscal year 1993-94 through 1995-96.
  • To calculate part of the costs to assess the STJs, the board used estimates of workload (workload factors) that were either developed without benefit of workload studies or were not updated since they were developed using data from fiscal year 1987-88. Therefore, we are unable to conclude whether these costs were reasonable or equitable.
  • The board based its allocations to individual STJs, in part, on proportion of revenue rather than entirely on key indicators of workload such as the number of permits and the number of returns. The board's use of proportion of revenue led to 18 STJs being overcharged by nearly $1.7 million and 11 STJs being undercharged by the same amount in fiscal year 1995-96.
  • The board made two minor errors when it calculated the STJ assessments for fiscal year 1995-96.


Because the cost model used by the board reflects a significant policy decision to allocate infrastructure costs to the entities that benefit from the board's tax administration system and because of the impacts caused by the application of the cost model, the State's policy makers should examine whether STJs should bear a percentage of the infrastructure costs associated with the board's administration of sales taxes.

To ensure reasonable and equitable assessments to the STJs, the board should:

  • Stop charging the STJs for partial costs of administering the two statewide half-cent sales taxes;
  • Use workload factors that are based on workload studies;
  • Periodically update the workload factors it uses in the model to calculate direct costs;
  • Allocate costs to individual STJs based on key indicators of workload, such as the number of permits and the number of returns, rather than proportion of revenue; and
  • Correct the minor errors we identified.

Agency Comments

The board states that it has no conceptual disagreement with our findings, the report's recommendations are worthy of further consideration, and it will follow the direction of the Governor and Legislature with regard to any changes in policy.