Performance audit, Tax Advisory Council

              PERFORMANCE AUDIT
TAX ADVISORY COUNCIL
A Report to the Arizona Legislature
By the Auditor General
DOUGLAS R. NORTON. CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
May 3, 1985
Members of the Arizona Legislature
The Honorable Bruce Babbitt, Governor
Mr. J . E l l i o t t Hibbs, Chairman
Tax Advisory Counci 1
Transmitted herewith is a report of the Auditor General, A Performance
Audit of the Tax Advisory Council. This report i s i n response to an
April 27, 1983, resolution of the Joint Legislative Oversight Committee.
The performance audit was conducted as a part of the Sunset Review set
forth i n A. R. S. § § 41- 2351 through 41 - 2379.
This performance audit report i s submitted to the Arizona State
Legislature for use i n determining whether to continue the Tax Advisory
Counci 1 beyond i t s scheduled termi nation date of July 1 , 1986. The report
concl udes the Council has not accompl ished i t s statutory mission.
However, other organizations effectively ful f i l l the Council ' s purpose,
making the Council unnecessary.
My staff and I will be pleased to discuss or clarify items i n the report.
Staff: Will iam Thomson
Peter N. Francis
Stephen G. Adel stein
Stuart Go1 dstein
Encl osure
Respectful ly submitted,
~ ouglus R. Norton
Auditor General
1 1 1 WEST MONROE SUITE 600 PHOENIX. ARIZONA 85003 ( 602) 255- 4385
The Office of the Auditor General has conducted a performance audit of the
Tax Advisory Council i n response to an April 27, 1983, resolution of the
Joint Legislative Oversight Comrni ttee. This performance audit was
conducted as part of the Sunset Review set forth i n A. R. S. § § 41- 2351
through 41 - 2379.
The Tax Advisory Council was created i n 1973 i n the same legislation that
created the Department of Revenue and the State Board of Tax Appeals. The
Council's purpose as set forth i n i t s statutes i s to " provide for a
continuing review and exchange of ideas for a f a i r and uniform system of
taxation" and " to f a c i l i t a t e the efficient, economical and effective
administration of taxation and revenue collection" i n Arizona. The
Council i s required to report to the Department of Revenue, the Governor
and the Legi sl ature.
The Council has failed to f u l f i l l i t s statutory mission. I t has developed
few suggestions to improve the tax system, and discussion topics have been
1 imi ted. In addition, there has been very 1 i ttl e communication between
the council and State policy makers. Further, other organizations
effectively ful f i l l the Council ' s purpose, making the Council
unnecessary. Consequently, the Counci 1 shoul d be a1 lowed to terminate
under the Sunset statutes.
TABLE OF CONTENTS
TAX ADVISORY COUNCIL
- PAGE
INTRODUCTION AND BACKGROUND . . . . . . . . . . . . . . . . . . . . 1
SUNSET FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . 3
FINDING: THE TAX ADVISORY COUNCIL IS NOT NECESSARY . . . . . . . . 7
The Council Has Been I n e f f e c t i v e
I n Achieving I t s Purpose . . . . . . . . . . . . . . . 7
Necessary Review I s Accomplished By Others . . . . . . . 9
Recommendations . . . . . . . . . . . . . . . . . . . . . 11
INTRODUCTION AND BACKGROUND
The Office of the Auditor General has conducted a performance audit of the
Tax Advisory Council i n response to an April 27, 1983, resolution of the
Joint Legislative Oversight Committee. This performance audit was
conducted as part of the Sunset Review set forth i n Arizona Revised
Statutes ( A. R. S. ) § § 41- 2351 through 41 - 2379.
The Council was created i n 1973 i n the same legislation that created the
Department of Revenue and the State Board of Tax Appeals. The Department
of Revenue ( DOR) i s the tax collection and enforcement agency of the
State, and administers laws relating to taxation. The Board of Tax
Appeal s hears and deci des appeal s by taxpayers from deci si ons rendered by
DOR. The Council i s intended to communicate any problems identified
during the appeals process and possible solutions to DORY the Legislature
and the Governor.
The Council i s composed of nine members: the director of the Department
of Revenue who serves as chairman, all six members of the State Board of
Tax Appeal s, and two private citizens appointed by the Governor for 3- year
terms. Statutes require that Council meetings be held a t least quarterly.
The Council does not have a budget or staff of i t s own. Tax Appeals Board
members receive $ 50 per day for time spent i n the performance of their
duties and compensation for travel expenses from the Board of Tax
Appeals. Public members receive $ 50 per day for time spent i n the
performance of their duties and travel reimbursement from the Department
of Revenue. The Department of Revenue also provides secretarial and
support services to the Council.
Scope Of Audit
Our audit addressed issues set forth in the 12 Sunset Factors i n A. R. S.
$ 41- 2354, and more specifically studied whether the Council serves a
necessary function and should be continued.
The Auditor General and staff express appreciation to the members of the
Council and the Department of Revenue for their cooperation and assistance
during the audit.
SUNSET FACTORS
I n accordance with A. R. S. $ 41 - 2354, t h e Legislature should consider the
following 12 factors i n determining whether the Tax Advisory Council
shoul d be continued or termi nated.
1. Objective and purpose i n e s t a b l i s h i n g t h e Council
The Tax Advisory Council's objectives and purposes as set f o r t h i n
A. R. S. S42- 111 are t o " provide f o r a continuing review and exchange of
ideas f o r a f a i r and uniform system o f taxation" and " t o f a c i l i t a t e
the e f f i c i e n t , economical and e f f e c t i v e administration o f taxation and
revenue c o l l e c t i o n " i n Arizona. The Council i s intended t o provide a
forum f o r informed i n d i v i d u a l s t o share concerns and develop remedies
t o tax problems. The Council's statutory charge i s t o provide a
channel o f communication t o the Department of Revenue ( DOR), the
Governor and the Legislature. The Council does not have statements
for goals and objectives and has no plans t o develop any i n the future.
2. The effectiveness with which the Council has met i t s objective and
purpose and the e f f i c i e n c y w i t h which the Council has operated
The Tax Advisory Council has not successfully met i t s statutory
objectives. The Council has made some e f f o r t t o review t h e f a i r n e s s
and uniformity o f Arizona's tax system, and has provided feedback t o
government p o l i c y makers on two occasions. However, the few
recommendations developed by the Council have not been seriously
considered by the Legislature. The d i r e c t o r o f DOR has stated t h a t
t h i s i s probably because they provided l i t t l e substance t o p o l i c y
makers. Overall, the Council has f a i l e d t o communicate with the
Legislature and the Governor i n a t i m e l y or periodic manner. I n
addition, the Council has provided no recommendations t o DOR t o
improve the e f f i c i e n c y and effectiveness o f tax admini s t r a t i o n ( see
page 8).
I n addition, the Council f a i l e d t o hold t h e required meetings f o r any
of the 1 ast 5 years. A1 though the Council i s required by 1 aw t o hold
meetings a t l e a s t quarterly, it has f a i l e d t o do so ( see page 9).
3. The extent t o which the Council has operated w i t h i n t h e p u b l i c i n t e r e s t
If the Council f u l f i l l e d i t s mandate it would operate w i t h i n the
p u b l i c i n t e r e s t . The Council has been ineffective i n achieving the
purpose f o r which it was o r i g i n a l l y established, and has provided
1 i t t l e b e n e f i t t o the State.
4. The extent t o which rules and regulations promulgated by the Council
are consistent with the 1 egis1 a t i v e mandate
Statutes do not require promulgation o f any rules and regulations, and
the Council has not done so.
5. The extent t o which the Council has encouraaed i n ~ u tfr om the ~ u b l i c
before promulgating i t s rules and regulations and t h e extent t o which
it has informed t h e p u b l i c as t o i t s actions and t h e i r expected impact
on the public
The Council has not adequately informed the public about i t s actions
because it has f a i l e d t o comply with several aspects o f the open
meeting law. Council minutes and agendas are inconsistent and do not
f u l l y conform to legal requirements. Some Board minutes have f a i l e d
t o make proper a t t r i b u t i o n s t o speakers, failed t o i d e n t i f y guests
attending the meetings, and f a i l e d t o l i s t the names o f members not
attending the meetings.
Council agendas have a1 so f a i l e d t o conform t o open meeting law
requirements. On some occasions, agendas have not been available 24
hours before the scheduled Council meeting and have lacked adequate
detai 1.
6. The extent t o which the Council has been able t o investigate and
resolve complaints t h a t are w i t h i n i t s j u r i s d i c t i o n
This factor does not apply because the Council i s not a regulatory
agency.
7. The extent t o which the Attorney General. or any other a ~ ~ l i c a b l e
agency of State government has the authority t o prosecute actions
under enabl i ng 1 egi s l a t i on
The Council i s not responsible f o r enforcing tax laws. This i s the
r e s p o n s i b i l i t y of the Department o f Revenue. Therefore, t h i s factor
i s not applicable.
8. The extent t o which the Council has addressed deficiencies i n the
enabling statutes which prevent it from f u l f i l l i n g i t s statutory
mandates
The Council has not proposed l e g i s l a t i o n t o amend i t s statutes and no
changes t o i t s l e g i s l a t i o n are planned.
9. The extent t o which changes are necessary i n the laws o f the Council
t o adequately comply with the factors 1 i s t e d i n the Sunset Law
Our review i d e n t i f i e d no needed statutory changes.
10. The extent t o which termination o f the Council would s i g n i f i c a n t l y
harm the public health, safety or we1 fare
Termination o f the Council would not harm the public health, safety or
we1 fare, since the Council's r o l e o f advising DOR, the Governor and
the Legislature i s not necessary ( see page 9).
11. The extent t o which the level o f regulation exercised by the Council
i s appropriate and whether 1 ess or more stringent 1 eve1 s o f regulation
woul d be a ~ ~ r oat~ e r i
This f a c t o r does not apply because the Council i s not a regulatory
agency.
12. The extent t o which the Council has used p r i v a t e contractors i n the
performance o f i t s duties and how effective use o f p r i v a t e contractors
coul d be accompl i shed
The Council does not use p r i v a t e contractors i n connection with i t s
duties. There are no areas o f the Council's functions i n which
e f f e c t i v e use o f p r i v a t e contractors could be accompl i shed.
FINDING
THE TAX ADVISORY COUNCIL IS NOT NECESSARY
The Tax Advisory Council i s not necessary and could be allowed t o
terminate. The Council has been i n e f f e c t i v e i n achieving the purposes f o r
which i t was o r i g i n a l ly establ i shed. A1 though the Counci 1 ' s mission i s
s t i l l valid, i t s r e s p o n s i b i l i t i e s are being met by other public and
p r i v a t e organizations, making the Counci 1 obsolete.
The Council Has Been I n e f f e c t i v e
I n Achieving I t s Purpose
The Tax Advisory Council has f a i l e d t o f u l f i l l i t s statutory mission. The
Council has developed few suggestions t o improve the tax system, and
discussion topics have been limited. I n addition, the Council has not
consistently communicated i t s a c t i v i t i e s t o p o l i c y makers, as required by
1 aw. Furthermore, the infrequency o f Council meetings may a1 so 1 i m i t i t s
effectiveness.
The Tax Advisory Council's statutory purpose i s t o provide f o r a
continuing review and exchange o f ideas t o promote a f a i r and uniform tax
system, and t o f a c i l i t a t e the e f f i c i e n t and e f f e c t i v e administration o f
taxation and revenue c o l l e c t i o n i n Arizona. The Council i s chaired by the
d i r e c t o r o f DORY and a1 so includes two pub1 i c members and a l l s i x members
of the State Board o f Tax Appeals. The State Board o f Tax Appeals i s an
independent agency, not subject t o the control of the Department o f
Revenue, with the power t o equalize the valuation o f a l l property i n the
State and t o hear and decide a l l appeals from DOR decisions. The Council
was intended t o provide a communication channel between the Appeals Board
and pol i c y makers regarding probl ems encountered during the appeal s
process.
The Tax Council Has Accomplished L i t t l e - Tax Council a c t i v i t i e s have been
minimal. Since 1980 the Council has commented on proposed tax l e g i s l a t i o n
only twice. These analyses both related t o b i l l s involving property
c l a s s i f i c a t i o n or valuation, and were actually prepared by members of
Division I of the Board o f Tax Appeals outside the Council meeting
setting. These two reviews were given minimal consideration by the
Legislature because they provided l i t t l e substance t o p o l i c y makers.
V a l i d t o p i c s f o r discussion have been neglected by the Council. Since
1980, the Council has spent a majority o f i t s meeting time discussing
property value l e v e l s and assessment practices. Aside from property tax
matters, no other subjects have dealt with fairness and uniformity
issues. I n addition, the Council has spent very l i t t l e time reviewing the
efficiency and effectiveness of Arizona' s tax admini s t r a t i o n program and
has developed no useful recommendations i n t h i s area.
Some v a l i d topics may be purposely neglected by the Council because o f a
perceived c o n f l i c t o f i n t e r e s t with potential Board o f Tax Appeals cases.
Some Council members who are also on the Board have refused t o discuss
important issues t h a t may arise i n future Board cases. This a t t i t u d e has
1 imited one of the Council's most valuable sources of possible topics.
Failure To Communicate - The Council has f a i l e d t o communicate i t s
a c t i v i t i e s i n w r i t i n g t o the executive and l e g i s l a t i v e branches as
required by statute. A. R. S. 542- 1 12 requires t h a t the Council :
". . . shall render t h e i r findings, reports, and
recommendations i n w r i t i n g t o the governor, t o the
d i r e c t o r of the department of revenue and the
1 egi s l ature. "
Council members have not followed through t o ensure t h a t t h e i r ideas are
communicated t o p o l i c y makers.
Meetings Too Infrequent - F i n a l l y , the Council has f a i l e d t o hold the
required meetings f o r any o f the l a s t 5 years. The Council i s
statutorily required to hold meetings a t l e a s t quarterly. In none of the
l a s t 5 years has the Council satisfied t h i s requirement. According to
figures provided by DOR s t a f f , only 12 meetings have been held since
1980. Infrequent meetings, the failure to generate meaningful agenda
topics, and minimal communication w i t h the Governor and Legislature
suggests a lack of member i n t e r e s t i n Council functions.
Necessary Review Is
Accompl i shed By Others
Presently, other enti t i e s evaluate Arizona ' s system of taxation and
revenue collection. Tax Advisory Council oversight responsibil i t i e s are
being met by other private and public e n t i t i e s . In addition, the Board of
Tax Appeals does not need the Council i n order to provide effective input
on tax problems. Therefore, termination of the Council would not inhibit
identification of tax problems or proposal of sol utions to administrators
and policy makers.
Council Mission Fulfilled By Others - Numerous public and private e n t i t i e s
substantially f u l f i l 1 the Council ' s mission. These groups provide pol icy
makers and administrators w i t h an ongoing review of taxation problems and
suggestions for solutions. The following organizations are examples of
such groups: the Arizona Tax Research Association, the Arizona Chamber of
Commerce, Governor's Office, the Arizona Federation of Taxpayer
Associations, the Arizona Society of Certified Pub1 i c Accountants Tax
Liaison Committee, the Arizona Society of Practicing Accountants, the Tax
Committee of the Arizona Bar, the Municipal Sales Tax Study Commission,
and the County Assessor's Association. Various legislative committees and
1 egislative staff can provide forums for discussion and research, and
often prepare recommendations and proposals relating to tax problems of
a l l kinds.
DOR receives i n p u t from the private sector to review tax problems and
propose remedies. DOR maintains a close working re1 ationship w i t h several
private organizations that offer opinions on new legislation and DOR
administrative procedures. In addition, DOR can u t i 1 ize statutory powers
t o form special purpose councils or committees t o study s p e c i f i c t a x
problems. For example, A. R. S. S42- 1451 . B provides f o r a uniform
1 icensi ng, c o l l ection and audit committee t o study the State admini stered
sales tax system. Such a committee has been established. A1 so, A. R. S.
S42- 1ll. C gives the DOR d i r e c t o r the authority t o form special purpose
councils as required or " essential t o the publ i c interest." A1 though such
special purpose councils have not been formed, it i s desirable f o r the
d i r e c t o r of DOR t o have t h i s option.
Board Of Tax Appeals Does Not Need Council - State Board of Tax Appeals
members, who a1 so serve on the Council , woul d s t i 11 be abl e t o provide
feedback t o appropriate o f f i c i a l s i f the Council were terminated. Board
members are i n a p o s i t i o n t o i d e n t i f y specific tax problems generated by
cases on appeal. Termination of the Council would not i n h i b i t the
i d e n t i f i c a t i o n of taxation problems or p r o h i b i t d i r e c t communication with
tax administrators and tax p o l i c y makers by members o f the Board o f Tax
Appeals. Board statutes do not p r o h i b i t d i r e c t contact by members with
DOR s t a f f t o discuss problems generated by cases on appeal. I n addition,
Board members can communicate t h e i r concerns d i r e c t l y t o members o f the
Governor's s t a f f who e f f e c t tax p o l i c y changes. I n the past, Board
members have met with s t a f f o f DOR and the Governor's Office outside t h e i r
r o l e as Tax Advisory Council members t o discuss taxation problems.
Nothing p r o h i b i t s Board members from d i r e c t l y communicating with
1 egis1 ative commi ttees t o discuss problems, as 1 ong as specific pending
cases are not discussed. F i n a l l y , the d i r e c t o r o f the Department of
Revenue and most Counci 1 members be1 ieve t h a t the Counci 1 has accompl i shed
l i t t l e i n i t s present form and could be terminated. Some Council members
s t i l l feel t h a t the Council i s needed, but should be restructured.
CONCLUSION
The Tax Advisory Council i s unnecessary and could be a1 lowed t o terminate
under the Sunset statutes. The Council has been i n e f f e c t i v e i n achieving
the purpose f o r which it was established, and has provided 1 i t t l e b e n e f i t
t o the State. Private professional associations and publ i c e n t i t i e s
review taxation legislation and propose solutions to tax problems,
substantially f u l f i l 1 ing the Council ' s mission.
RECOMMENDATIONS
1. The Tax Advisory Council should be allowed to terminate under the
Sunset statutes.
2. The statutory authority i n A. R. S. $ 42- 1ll. C for the director of DOR t o
establish special purpose councils when necessary should be retained
i n DOR's statutes.
ARIZONA DEPARTMENT OF
REVENUE %
J. Elliott Hibbs Bruce Babbitt
Director Governor
April 26, 1985
Mr. Douglas Norton
Auditor General
111 West Monroe
Suite 600
Phoenix, Arizona 85003
Dear Mr. Norton:
This letter is in response to your recent performance audit of
the Tax Advisory Council. After reviewing your findings, I agree
with your recommendation that the Council should be abolished. It
has not been effective in bringing out suggestions for improving
our state's administration of taxes, nor has it outlined any
substantive options for revised tax policy. I feel the
composition of the Council limits its objectivity and makes it
difficult to discuss and develop policy on pertinent issues.
It is true that the Council has not met as regularly as it
should, but most of this is due to the general lack of interest
and inability of the members to define topics and tackle key
problems. Attendance at the meetings has been poor and there is
little input for meaningful, important agenda items.
To our knowledge we have consistently met open meeting
requirements. We have always taken the necessary steps to inform
the public prior to the meetings and attempted to prepare agendas
reflecting the subjects that were to be discussed. Tapes have
been availabale immediately for anyone to review the discussions
of the Council.
I agree with your analysis that the objectives of this Council
are being better met through the various private tax advisory
groups that currently work with the Department. Your report
cited such groups as the CPA Tax Liaison Committee, the Arizona
Society of Practicing Accounts and the Tax Committee of the
Arizona Bar Association, all of which provide valuable feedback
on problems in tax administration and are active in the
legislative arena to affect necessary policy changes.
Mailing address [ Capitoll:
1700 W. Washington
Phoen~ xA, Z 85007
Other locations:
Phoenix Uptown
5555 N. 7th Avenue
Tucson
402 W. Congress
Mr. Douglas Norton
Auditor General
Page Two
Therefore, I concur the Council is not a useful group for the
legislature to continue and that its regulatory status should be
allowed to expire.
Sincerely,
ARIZONA DEPARTMENT OF REVENUE