Publication 216, The First 100 Years


Martin Commission Recommends Abolition of the Board of Equalization

The California Tax Commission (Martin Commission) submitted its final report in 1929. While acknowledging the superiority of the “separation of sources” system over any prior system, the report stated that “from the analysis it has made, the Commission is convinced that the system of separation of sources, as established in 1910 by ‘Amendment Number One’, has outlived its usefulness and should be abandoned. Its faults are serious and fundamental.” 60 The 1929 Commission had this to say about the gross receipts taxes:

“Not only is the determination of the rates of the gross receipts taxes a task incapable of a satisfactory solution, even with the most refined technique available, but the gross receipts method itself, even when applied to a revised and complicated grouping of the utilities, yields results which from the point of view of equity are crude beyond any reasonable limit of tolerance.” 61

The Commission of 1929, with hopes of remedying the state’s system of taxation, made many recommendations, several of which were particularly germane to the Board of Equalization. One recommendation was rather startling: the Commission had recommended that the Board of Equalization be abolished and replaced by a permanent professional tax commission consisting of three members appointed by the Governor.62 Efforts to abolish the Board, wholly or partially through the creation of a Department of Revenue, would continue no less than forty times after this 1929 attempt.

A joint Legislative Committee, which had been appointed to study the 1929 Report, submitted its own report in January 1931. Essentially, the Joint Legislative Committee disagreed with the 1929 report, recommending instead that the existing system of taxation be retained. The only significant change resulting from the proposals of the Joint Legislative Committee was the creation of a Tax Research Bureau in the Board Equalization.

The Tax Research Bureau operated within the Board during 1932 and part of 1933, when the law which created the bureau was repealed. In that brief period of its existence, the bureau contributed significantly to the development of the California tax system. Under the direction of the Board and its Executive Secretary Dixwell Pierce, the bureau achieved the following:

  1. Board Counsel Roger M. Traynor and Assistant Counsel Frank M. Keesling submitted a 200-page report to the Legislature recommending numerous changes in the Bank and Corporation Franchise Tax Act, explaining in detail why these changes should be made. Included were provisions for a new method of computing the tax rate on banks and corporations. This proposal led directly to the 1933 amendments which provided that banks and financial corporations should pay the same rate of franchise tax measured by income as corporations generally, and in addition, should pay a rate equal to the percentage of the income of general business corporations paid in personal property taxes. This system, still in effect, has produced enormous amounts of revenue for the state, while at the same time equalizing the tax burden between banks/financial corporations and general business corporations.
  2. The bureau proposed disallowance of a deduction for federal income taxes. That was an important step at the time, but it has assumed increasing importance over the years with the increase in federal corporate tax rates which, for a number of years, have been in the vicinity of 50 percent. This change annually provides the state with several hundreds of millions of dollars of additional revenue. Without this change, it would have been necessary to double the rates of the franchise tax to produce the same amount of revenue. This would have required rates of from 18 to 22 percent, which would have been politically difficult if not impossible to justify.
  3. A significant change was the substituting of March 1, 1913 for January 1, 1928 as the date for determining the basis of property for the computation of gains and losses and depreciation. In addition to conforming to the federal law, this change resulted in the taxation of gains realized after the Franchise Tax Act became effective which accrued between March 1, 1913 and January 1, 1928.
  4. To plug other serious loopholes, changes were made in the computation of the tax on commencing corporations and dissolving corporations. All these aforementioned changes were enacted by the Legislature in the exact form proposed and have continued as integral parts of the Franchise Tax Act to the present.
  5. The Tax Research Bureau also recommended the Ton-Mile Tax for trucks, and recommended changes that would tighten and equalize the collection of local property taxes on motor vehicles. Although the latter changes were not adopted, they led to a proposal conceived later by Dixwell Pierce, which he drafted as legislation. Enacted by the Legislature, the new law increased the motor vehicle registration fee by an amount to cover local property taxes. Half this additional fee is allocated to the highway fund and the other half to the counties.
  6. In 1933, while still serving as Counsel and Assistant Counsel to the Tax Research Bureau, Roger Traynor and Frank Keesling drafted legislation providing for a personal state income tax. It was enacted by the Legislature but vetoed by Governor Rolph.
  7. Traynor, Keesling, and Harry L. Say also drafted a bill providing for a tax on the sale of tangible personal property. It was enacted in 1933. The bill levied the tax on retailers, not on consumers. Through the years, the California courts and some lower federal courts upheld this concept until 1976, when the United States Supreme Court in Diamond National vs. State Board of Equalization, 425 U.S. 268 held that the provision regarding the collection of the tax by retailers from consumers indicated an intent on the part of the Legislature that the tax should be considered a tax on consumers.

These were some of the major contributions of the Tax Research Bureau of the Board of Equalization.

The 1929 California Tax Commission (Martin Commission) seems to have prompted little action on the part of either the joint Legislative committee or the Legislature; nevertheless, it made three very significant contributions to California’s tax structure. First, the 1929 Commission submitted a special report which became the basis for the enactment of the Bank and Corporation Franchise Tax. Secondly, the Commission's assertion of the futility of the “separation of sources” tax structure led directly to the repeal of the public utilities “gross receipts” taxes. Finally, the Commission’s Report provided a wealth of information as background for much of the tax legislation that was enacted during the 1930s.

Although the Commission had proposed abolishing the Board of Equalization, the groundwork it laid for subsequent expansion of the state's tax programs actually had the opposite effect: it established the Board's predominance in tax administration.

In a statement before the Subcommittee on Alcoholic Beverage Control of the joint Interim Committee on Governmental Reorganization (November 23, 1953, in Woodland), Legislator John F. O'Donnell said:

“In 1933 . . . the Honorable James Rolph, Jr. was Governor . . . The state finances were in deplorable condition . . . the Governor got all the blame. There was one outstanding group in State Government at that period as the Governor was in quite a quarrel with both houses of the Legislature . . . The one towering figure in the state administration (was the State Controller), the Honorable Ray Riley, and the other Members of the Board of Equalization . . . During that period . . . (when it came to) placing the administration of different (tax) measures . . . we just whipped them all over to the State Board of Equalization . . .”

Much of the high esteem in which the Board was regarded was engendered by Dixwell Lloyd Pierce who was appointed Executive Secretary in 1926 when he was only 29 years old. He was to serve with distinction in that position for 37 years. Pierce had earned his Bachelor of Law degree at Boalt Hall, the University of California Law School. Extremely knowledgeable about taxes, he was a brilliant theoretician and an exemplary administrator, “the ultimate administrative politician,” in the words of one Board Member. It was also asserted that Pierce was at least somewhat responsible for the appointment by Governor Culbert L. Olsen of former Board Counsel Traynor as Chief Justice of the California Supreme Court.

Traynor termed Pierce “the brains of the Board of Equalization,” adding that “he kept the administration of the Board sound and inspired the confidence of taxpayers throughout the state.” Pierce was deeply involved in the activities of the Tax Research Bureau and in its significant contributions to the California tax system. Along with Traynor and Pierce, Board attorneys Keesling and Felix Wahrhaftig served on the bureau. A major milestone in California’s tax history was the Sales Tax Law, propounded and developed by the bureau, and assigned by the legislature to the Board for administration. Once the law was in operation, Traynor left his position as Director of the Sales Tax in 1933 to teach law at the Berkeley campus of the University of California. However, he continued to serve the Board as a tax consultant, and commuted weekly to Sacramento to work with the Tax Research Bureau, to perfect the tax system and develop implementing legislation and regulations.

Traynor recalled that Pierce worked to build the Board and expand its duties. A former journalist, Pierce was meticulously attentive to detail, a fount of ideas that Board Member Fred Stewart would take to the legislature, where his influence assured that they would be enacted into law. Traynor proclaimed Stewart” a tower of strength for the Board . . . the driving force that sold Pierce’s ideas.”

Stewart and Pierce were two of the three founders of the National Association of Tax Administrators, a nationally prominent organization for the past half century.

It has been said that the history of taxation in California and the career of Dixwell Pierce are synonymous. When he joined the Board in April 1926, there were only seven employees. When he retired July 1, 1963, he directed a statewide staff of 2,500. At his death in August 1964, the Sacramento Bee described him as “the almost indispensable man in California tax administration for nearly four decades.”

Chief Justice Traynor praised Pierce, said he was “as devoted a public servant as the state ever had . . . He enjoyed the respect of the Legislature, the Governor, and the citizens of California.”

Surely no individual has left a greater imprint on the Board of Equalization and on taxes in California.

60 Final Report of the California Tax Commission (Sacramento: State Printing Office, 1929), p. xxi

61 Ibid., p. 66

62 Ibid., p. 24