BILL ANALYSIS Ó SENATE COMMITTEE ON APPROPRIATIONS Senator Ricardo Lara, Chair 2015 - 2016 Regular Session AB 1157 (Nazarian) - Property taxation: certificated aircraft assessment. ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: May 4, 2015 |Policy Vote: GOV. & F. 6 - 0 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: Yes | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: August 17, 2015 |Consultant: Robert Ingenito | | | | ----------------------------------------------------------------- This bill may meet the criteria for referral to the Suspense File. Bill Summary: SB 1157 would extend the lead assessor methodology to value certificated aircraft for one additional year, through fiscal year 2016-17. Fiscal Impact: The precise revenue impact of this bill relative to current law is unknown. Property tax revenues for the additional year utilizing the lead assessor methodology could higher or lower than what would have occurred absent the bill. Approximately 50 percent of property tax revenues AB 1157 (Nazarian) Page 1 of ? statewide accrue to schools, which generally offsets state General Fund obligations pursuant to Proposition 98. Consequently, any change in the school share of property tax revenues that is attributable to the bill's impact on assessed values would, in turn, impact General Fund expenditures. BOE's costs to implement the bill would be minor and absorbable. Background: Current law (1) provides that all property is taxable unless explicitly exempted either by the Constitution or federal law, (2) limits the maximum amount of any ad valorem tax on real property at 1 percent of full cash value, and (3) precludes reassessment unless the property is newly constructed or changes ownership. In contrast, assessors value personal property each year. In 1850, the Legislature first directed county assessors to tax property; however, assessors in different counties often applied different tax rates and methodologies. Inconsistencies were especially acute between counties dominated by mining and agriculture. In 1879, the Board of Equalization (BOE) was created to equalize rates and assessment practices among counties. In 1910, voters amended the Constitution to direct BOE to value property that crossed county lines, including that owned by railways, companies selling gas and electricity, or telephone companies. Generally, assessors value business personal property such as aircraft by multiplying the taxpayer's cost of acquiring it by an inflation adjustment to estimate the cost to replace the property at current market prices. This "reproduction cost new" is then multiplied by a depreciation factor to provide an estimate of the depreciated reproduction cost of the property, which becomes the taxable value of the property for the fiscal year. Assessors may only value certificated aircraft with "situs" in California on a fleet basis. Once assessors calculate value, they must apportion it among counties based on a weighted AB 1157 (Nazarian) Page 2 of ? average of (1) the fleet's ground and flight time (75 percent) and (2) arrivals and departures (25 percent) measured only during the "representative period," currently designated by BOE as the second full in week in January. This apportioned fleet value is then multiplied by the appropriate rate for the tax rate area in that county. Until 1998, state law did not prescribe a specific method for assessors to determine the value of aircraft, resulting in years of disagreements and litigation between assessors and airlines. In 1998, the Legislature detailed a valuation methodology for certificated aircraft which was presumed to equal the fair market value of the aircraft for those years, enacting three bills to codify a settlement agreement between several counties and airline industry representatives. In 2003, the agreement expired, and assessors again locally valued aircraft. In 2006, assessors and the airlines again agreed on a new valuation methodology (AB 964, Horton), and directed a "lead assessor" to value each airline's fleet; this new methodology had a sunset in 2010-11. Instead of filing property statements with each county, airlines instead file a single consolidated statement with a single assessor designated by the Aircraft Advisory Subcommittee of the California Assessors' Association. The measure established categories for various types of aircraft, and set forth a valuation methodology for each. The bill also directed the lead assessor to audit the airline every four years AB 964 also directed assessors to analyze the cost to determine whether an economic obsolescence allowance should apply. To determine economic obsolescence for mainline jets and regional aircraft, the assessor calculates three factors for both the previous calendar year and the past ten years: average net revenue per seat mile, net load factor, and yield. The assessor then compares each factor's previous calendar year value with its value for the past ten years to determine the amount of difference. The assessor then applies a weighted average of the indicated percentage adjustments: net revenue per available seat mile (35 percent), net load (35 percent), and yield (30 percent). The assessor must reduce the original cost by the AB 1157 (Nazarian) Page 3 of ? percentage, but only if the final economic obsolescence exceeds 10 percent. The methodology set forth in AB 964 was extended until 2015-16 (AB 384, Ma). With AB 384's sunset approaching, certificated aircraft will revert to local assessment without a lead assessor on January 1, 2016, requiring each assessor where a plane lands to independently value aircraft. Proposed Law: This bill would extend, until 2016-17, the application of the current assessment methodology for determining the fair market value, for tax purposes, of certificated aircraft owned by commercial air carriers, and would extend, until December 31, 2016, the procedures for selecting a lead county to calculate an airline's fleet value and a coordinated multi-county audit team to perform mandatory audits of commercial air carriers. Related Legislation: SB 661 (Hill) would transfer assessment of airline personal property from local assessors to the Board of Equalization (BOE). The bill was held under submission on this Committee's Suspense File. Staff Comments: This bill would maintain the status quo for one additional year. The revenue realized under the existing valuation methodology would likely differ from that derived from the methodology used prior to 1998, when valuation was left to each individual assessor. However, the magnitude and direction of the difference are unknown. -- END -- AB 1157 (Nazarian) Page 4 of ?