Franchise Tax Board warns IRS staffing cuts could erode California revenue

At a hearing of the California State Assembly Budget Subcommittee on Accountability and Transparency, the Franchise Tax Board described how reductions in Internal Revenue Service staffing and related federal delays could dent state tax collections and complicate return processing.

Roger Lackey, representing the Franchise Tax Board, told the panel the state’s tax filing system depends heavily on federal forms, information reporting and timely IRS data. "95% of taxpayers actually file electronically," Lackey said, describing how state returns depend on software schemas and federal information reporting that the Franchise Tax Board and the IRS share. He noted most California returns are prepared through tax software and by professionals, and that delays or changes at the federal level cascade into state processing.

The subcommittee said the risk is especially acute for corporate and large multinational audits that rely on sustained IRS enforcement. Chair Hart pressed the point: with federal enforcement staff declining, "How are you gonna compensate in that environment and make sure that California gets the revenue that we expect from the companies that are operating here in California?" Lackey responded that compliance programs are adjusted annually and that FTB works with partners to adapt to changing circumstances.

Why it matters: California’s income and corporate taxes are the state’s largest revenue sources. The subcommittee framed the hearing as a forward-looking review to inform the May revision of the state budget and requested follow-up information on specific data points discussed at the hearing.

Key details from the FTB testimony and committee exchanges include: - The FTB said most returns are received electronically through commercial tax software; tax professionals prepare roughly 60% of returns. - Typical refund processing timelines for taxpayers were described as seven to 10 days when filings are complete. - The FTB flagged several federal–state partnerships that underpin enforcement and compliance, including fraud-prevention programs, offset programs that reconcile federal and state liabilities, information reporting programs (for example, the IRS-led reporting channels that states can opt into), and agreements to receive IRS audit and agent reports for state compliance work. - The board discussed the “non filer” and other compliance streams that often rely on federal-provided information; when IRS data are delayed or limited, state compliance work can be impeded.

Committee follow-up and requests: Assemblymembers asked the FTB to provide committee staff with more detailed counts and trends for filers using individual taxpayer identification numbers (ITINs); Lackey agreed to report back. Members urged the administration and Legislature to consider contingency options, including targeted state investments in enforcement capacity if federal cooperation and staffing fall short.

The hearing also included a broader budget context presented later by the Department of Finance and other panels, but committee members singled out the FTB testimony as central to understanding near-term state revenue risk.

The subcommittee will consider the FTB’s follow-up data and the Department of Finance’s federal funding analyses as it prepares the May budget revision.