Should state tax law judges be independent?

For years administrative law judges that handle state tax cases were a part of the State Comptroller’s department. Taxpayers and tax professionals questioned the independence of judges who worked for the state’s chief tax collection officer. In 2007, at the encouragement of newly-elected Comptroller Susan Combs, the legislature passed a law that transferred the tax judges to the State Office of Administrative Hearings (SOAH). Most administrative law judges (ALJ) for other Texas state agencies are part of SOAH.

The independence issue remains, however, because the State Comptroller can overrule an ALJ’s decision in a tax case. This is not unique to the Comptroller or tax cases – most state board regulators can do likewise. For example, the Texas State Board of Accountancy can overrule an ALJ in a case brought against a CPA. There are some rules that have to be followed and the justification for any overrule has to be published, but the final decision still rests with the state’s chief tax collector.

The legislation transferring the tax judges to SOAH has a sunset provision; if the legislature does not renew the legislation in the 2015 session, the judges will be transferred back to the Comptroller’s office. The Sunset Advisory Commission (SAC) will be holding hearings on the issue during the Interim.

Since 2007, some states have implemented completely independent tax tribunals to hear contested tax cases. HB 2488 by Rep. Van Taylor (R-Plano) was filed during the last session to establish a tax tribunal in Texas. The bill was heard before the House Ways and Means Committee but the committee never took a vote on the bill.

It’s interesting to note that the Comptroller’s office opined that having an independent tax tribunal would cost the state $894 million in lost revenue over the biennium. Part of that is probably because the legislation eliminated the long standing “pay to play” rule which currently requires the payment of any disputed taxes before you can take your case to a tax law judge. This means it’s likely that more cases would be taken to court. The Comptroller’s rationale in the fiscal note attached to the legislation states: “The CPA [Comptroller of Public Accounts] also assumes it would be necessary to create a reserve for the payment of refunds as well as to anticipate the declines in tax collections that will occur subsequent to rulings that the state cannot appeal …” That makes it sound like an independent tax law judge would be more likely to rule against the state than under the current system.

The SAC will get to sort it all out with analysis and public hearings on the issue, so interested parties should watch the SAC schedule if they wish to offer input. The SAC will ultimately make recommendations to the legislature. If no action is taken by the legislature, tax judges will once again reside in the State Comptroller’s office.

Since current Susan Combs is not running for reelection, it might be interesting to ask those seeking to replace her as Comptroller what they think about independent tax law judges for Texas. So far those candidates are Sen. Glenn Hegar (R-Katy), Rep. Harvey Hilderbran (R-Kerrville), CPA former Rep. Raul Torres (R-Corpus Christi) and former Republican primary governor candidate Debra Medina. So far there are no announced Democratic candidates for the job.

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