Ready. Set. Showdown.

In February 2005, the California Franchise Tax Board announced the launch of the ReadyReturn pilot for the 2004 tax year, stirring immediate controversy.

by / April 28, 2007

It's the little things that cause big trouble.

A California agency created an unusual, new method of tax filing for state residents with extremely simple returns. Normally a state agency wins acclaim for taking a fresh approach to streamlining transactions with its constituents.

Not so in this situation.

Instead, the new method, called ReadyReturn, sparked an intense battle between the state's tax agency and the California Legislature. ReadyReturn ignited an equally heated lobbying campaign to kill the program - a campaign masterminded by manufacturers of tax preparation software, who argued that ReadyReturn unfairly competed with their products. And taxpayer groups questioned whether California's tax collector should also serve as a tax preparer.

The fight didn't end until December 2006, and state lawmakers nearly succeeded in killing ReadyReturn. But a last-minute, unanimous vote by the tax agency's governing board defied the Legislature and spared ReadyReturn from the executioner's ax - at least for one more year.

With the long-term outcome still uncertain, California's continuing ReadyReturn drama illustrates the upheaval created by innovations that challenge the status quo.


Trouble Brewing
The California Franchise Tax Board (FTB) administers two of the state's major tax programs: the personal income tax and the corporation tax. In February 2005, the FTB announced the launch of the ReadyReturn pilot for the 2004 tax year, stirring immediate controversy.

The ReadyReturn process itself is straightforward. For citizens with the simplest tax returns - those with wages earned from a single employer, no dependents and no deductions - the FTB uses income data from employer W2 forms to calculate income and the tax owed, then sends a completed tax form to taxpayers who elect to participate. The service is offered for free to qualified residents.

By offering ReadyReturn, the FTB put itself in a novel role - a tax-collection agency would prepare income-tax returns for certain taxpayers. This dual role sparked heated debate, via opinion pieces in newspapers throughout the state, over a tax agency taking this unprecedented step.

Critics contended that ReadyReturn had conflict of interest written all over it. Supporters countered that the program removed unnecessary mystery from the income-tax process.

The FTB's premise for offering the ReadyReturn service was simple, said Steve Westly, California's state controller from 2003 to 2007.

Because the FTB receives personal income information from employers via W2 forms, Westly said, the agency has all the necessary information to fill out an income-tax return for the taxpayer and perform income-tax calculations on that return.

The FTB mailed the completed returns to approximately 50,000 taxpayers selected to participate in the ReadyReturn pilot, and those taxpayers decided what to do. The taxpayer could either ignore the invitation and prepare his or her own tax return; verify the information on the completed return, sign it, and return it to the FTB; verify the information on the completed return, then visit the FTB's Web site to electronically file the return; or make modifications to the form.

Westly supported ReadyReturn because it fit his vision of how state government ought to operate, and it removed a layer of complexity from the state's income-tax system.

"I said when I ran for office that I was going to bring technology to state government in California," Westly recalled, "and I was going to bring technology that would be not only cost-effective, but would help improve people's lives."

Before being elected to office, Westly became one of the early executives of Internet-commerce pioneer eBay. He joined the company in 1997 and went on to hold a series of executive-level positions. Technology also played a central theme in his campaign for controller.

When the initial idea for ReadyReturn surfaced, Westly said he spoke with Joseph Bankman, a leading tax law scholar and the Ralph M. Parsons professor of law and business at Stanford Law School. He said Bankman compared the concept behind ReadyReturn to how property taxes are collected in California.

When property-tax time rolls around every year, assessors do not send homeowners a stack of tax tables and a complicated form and ask them to calculate their own property taxes.

"Assessors say,

Shane Peterson Associate Editor