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Taxing Times in California

by Iain Murray Thursday, Jul. 17, 2003 at 11:22 AM

The depths to which his California has fallen.

download PDF (192.5 kibibytes)

Stories of taxpayer abuse at the hands of the IRS were once so common as to be cliché, but Gil Hyatt recently discovered that California's state taxing authorities can be even nastier. On April 22, the Supreme Court rewarded his persistence, unanimously declaring that his lawsuit against California for harassment, trespassing, extortion, and violation of privacy could move forward. This was good news, of course, for Hyatt, but it was also very good news for Californians, who will now get to see clearly how state employees are using state power to harass, intimidate, and abuse the very taxpayers they are sworn to protect and who just happen to pay their salaries.

The Court's involvement came about because of California's obscenely high income taxes. Gil Hyatt, a wealthy and successful inventor-entrepreneur, felt forced to leave high-income-tax California for no-income-tax Nevada. Rather than confront the reality that California's taxes were driving away the state's tax base, California proceeded to assert that Hyatt never left.

The Supreme Court said that the state of Nevada was not required under Article IV of the Constitution to give full faith and credit to California's law providing broad legal immunity to its state taxing authority, the California Franchise Tax Board. Ordinarily, such legal gobbledygook would be of interest only to scholars of constitutional law, but the practical consequences could be much more important. According to U.S. Congressman Christopher Cox (R., CA), California "lost this case on the law. If there is any justice, Mr. Hyatt will win his lawsuit on both the law and the merits." Indeed, the lawsuit which will now go forward against the Franchise Tax Board could shed light on unseemly and extortionate practices by California's taxing authority that are driving law-abiding taxpayers out of the state.

From the beginning, California had fought to prevent the hearing of Hyatt's claims of abuse and urged every level of Nevada's court system to dismiss his case, claiming that California state law reigned supreme over a Nevada resident — law that would provide full immunity to the Franchise Tax Board for even the most heinous of actions.

Governor Davis's loss at the hands of the Supreme Court reflects his administration's warped commitment to wasteful spending and unremitting tax increases. The Supreme Court's decision signals a triumph for California taxpayers over the tax-grabbing hallucinations of the Governor and his compatriot, Attorney General Bill Lockyer.

Even as California faces a budgetary shortfall of up to billion through the next fiscal year, Governor Davis used scarce California taxpayer funds to hound and prosecute residents of other states. Franchise Tax Board agents went so far as to travel to Nevada to rummage through Gil Hyatt's garbage.

Most troubling amongst the actions of the Franchise Tax Board were the collection of harmful statements from third parties about Hyatt's personal life and subsequent threats to publish them in court documents in order to extort a settlement. As the proverbial straw that broke the camel's back, the Franchise Tax Board's decision to publish Hyatt's home address and Social Security number confirmed his worst fears about government meddling and waste.

The Franchise Tax Board's treatment of Gil Hyatt is only the most recent example of the Davis administration's ongoing mismanagement of state resources, reflected in the form of mounting budget deficits and endless tax increases. Echoing Governor Davis's calamitous handling of the California electricity crisis, the Franchise Tax Board pursued every opportunity to avoid Hyatt's legitimate complaints. Fortunately, while Californians still suffer the effects of Davis's disastrous energy policies, taxpayers have received a reprieve from the Supreme Court, stopping the Franchise Tax Board's tort shenanigans.

Of course, these shenanigans don't come cheap. In a time of budgetary crisis, Governor Davis has wasted millions of taxpayer dollars on failed litigation adventures in other states. According to Grover Norquist, president of Americans for Tax Reform, "Instead of providing a more favorable business climate," Governor Davis instead used his powers "to try to intimidate former residents into paying large tax settlements that are no longer owed to California."

Despite the malfeasance of government bureaucrats, it is a healthy sign for our democracy that an individual taxpayer can fight to level the playing field between taxpayers and taxing authorities. Whatever happens to Gov. Davis, now that the Supreme Court has ruled that Hyatt's suit against the Franchise Tax Board can move forward, California taxpayers can hope that the merits of their arguments, rather than the threat of endless lawsuits, will win the day.

— Iain Murray is a senior fellow at the Competitive Enterprise Institute in Washington D.C.

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