Publication 216, The First 100 Years


Tax Innovations of the 1930’s

During the tax crisis of 1935, it was becoming increasingly apparent that the sales tax alone would not rescue the state from its monetary troubles. That was the year in which substantial state revenues heretofore provided by the public utilities were assigned to the counties. To augment the tax structure, the 1935 Legislature added several new taxes; the most important was the Personal Income Tax.

The Board of Equalization had suggested an income tax as early as 1914 in its 1913-14 biennial report: ldquo;The inauguration of an income tax might be regarded as an important step forward in the direction of a sounder system of taxation . . .” 83 Both the 1917 and 1929 Tax Commissions had considered an income tax. The Legislature had actually enacted an income tax bill in 1933 (Assembly Bill 2429), but it was pocket-vetoed by Governor Rolph. This legislation had been drafted by Traynor and Keesling, and it was used again when the need for additional revenue sources prodded the Legislature into enacting the Personal Income Tax Act of 1935, Assembly Bill 1182 (Chatters). Signed by Governor Merriam on June 13, 1935, the Act was also patterned somewhat after the Federal Revenue Act of 1934. The law provided that this new tax “shall be levied, collected, and paid for each taxable year upon the entire net income of every resident of this State and upon the net income of every non-resident which is derived from sources within this State.” 84

An attempt was made to place the administration of the personal income tax with the State Board of Equalization, but this proposal was rejected by the Legislature. Instead, the administration was placed in the hands of the Franchise Tax Commissioner. Nonetheless, the Board of Equalization assumed a vital role as the board of appeal for the personal income tax. When the Corporation Income Tax Act of 1937 was passed, to subject corporations engaging solely in interstate commerce to a tax comparable to the corporation franchise tax, administration again fell to the Franchise Tax Commissioner, and the Board of Equalization again became the agency of appeal. Thus, by 1937, the Board had become the appellate body not only for the taxes under its own administration, but also for both income and corporate taxes.

“The Franchise Tax Commissioner was blanketed into civil service in 1934. The civil service amendment to the Constitution (Article XXIV) failed to specify his exclusion. Because he was neither elected nor appointed by the Governor and could no longer be removed under the act which created his position, the Franchise Tax Commissioner became the only civil service employee not responsible to anyone for his conduct or professional actions . . .”

“Legislative investigations in 1948 revealed a picture of gross inefficiency and maladministration in the San Francisco office of the Franchise Tax Commissioner, an office which the incumbent had chosen to make his ‘home’ office. As a result of these revelations, the Legislature at the 1949 session abolished the civil service position of Franchise Tax Commissioner and created in its place the Franchise Tax Board which functions through an executive officer appointed by it and exempt from civil service. The Franchise Tax Board is composed exactly the same as the committee which formerly selected the Franchise Tax Commissioner—the Controller, Director of Finance, and Chairman of the Board of Equalization.” 85

John Campbell, who was serving as Director of the Sales Tax for the Board of Equalization was offered the new position of executive officer of the Franchise Tax Board. He demurred, reluctant to leave the Board of Equalization and give up the seniority and protection offered by his 27 years of civil service. Governor Earl Warren and State Controller Thomas Kuchel urged Campbell to accept the position. Campbell agreed to do so only if he could be guaranteed irrevocable job protection. To entice Campbell, the Legislature in 1949 enacted the unique two-thirds rule, providing that in order to prevent political pressure from influencing conduct of the office, the executive officer could be removed only by a two-thirds vote of the State Senate. Campbell accepted and held the job until he retired in 1963. At that time, State Controller Alan Cranston, Board of Equalization Chairman John W. Lynch, and State Director of Finance Hale Champion comprised the Franchise Tax Board. To replace John Campbell they appointed Martin Huff of Oakland, who served as executive officer until the two-thirds was rescinded by the Legislature late in 1979. Huff retired when the new law went into effect January 1, 1980. He was succeeded September 1, 1980 by Gerald H. Goldberg, Director, Department of Revenue, State of Missouri.

In 1937, three new taxes were introduced: the aforementioned Corporation Income Tax, the Use Fuel Tax, and the Private Car Tax. The Use Fuel Tax Act, effective July 1, 1937, was enacted to supplement the Motor Vehicle Fuel Tax. The new Act applied to fuels which were not subject to the earlier Act, particularly diesel fuel. Thus, the tax became known as the “diesel tax.” The Use Fuel Tax differed primarily because it was imposed on the user rather than the distributor. The Board of Equalization was charged with the administration and enforcement of the tax.

Under the Private Car Tax Act of 1937, the railroad “rolling stock” of nonrailroad companies-the so-called “private car” companies became subject to a state tax levy, based on assessments by the Board of Equalization, in lieu of all other ad valorem taxes. The history behind this act is explained by the Board:

“The passage of the Private Car Tax Act in 1937 was favored by the Board as the administrator of the act, and the private car companies who pay the taxes, because it simplified the entire procedure. Prior to 1937 private cars were assessed in the same manner as utility property, and it was necessary for the Board to assess the rolling equipment at hundreds of fixed locations throughout the state. From the taxpayers’ standpoint, the old law presented many problems because of the large number of tax bills in small amounts received by the companies. Under the new law, the taxpayer receives only one bill and remits one check to the state treasury.” 86

The Private Car Tax, which had become the only state property tax, was assessed and levied by the Board of Equalization.

Two years later, in 1939, a gift tax was added to the growing list of taxes. Administration of this tax, which was designed to counteract the avoidance of the inheritance tax, was assigned to the State Controller.

This concluded the tax legislation of the 1930s. The 1930s, though perhaps the worst economic period in the history of the state, must be considered the paramount period of revenue and taxation laws in California. With few exceptions, the revenue and taxation system initiated by the provisions of the Riley-Stewart Amendment, and the functions thereby imposed on the Board of Equalization, have remained in effect to this day.

83 Report or the State Board of Equalization 1913-1914, p. 50

84 Cal. Stats of 1935 Ch. 329, sec. 5, p. 1093

85 The Need for Department of Revenue in California-Report of the Subcommittee of the Assembly Interim Committee on Government Organization to the 1955 General Session of the California Legislature, p. 57

86 Report of the State Board of Equalization 1937-1938, p. 7