BILL ANALYSIS                                                                                                                                                                                                    

                             Senator Ricardo Lara, Chair
                            2015 - 2016  Regular  Session

          AB 1157 (Nazarian) - Property taxation: certificated aircraft  
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          |Version: May 4, 2015            |Policy Vote: GOV. & F. 6 - 0    |
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          |Urgency: No                     |Mandate: Yes                    |
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          |Hearing Date: August 17, 2015   |Consultant: Robert Ingenito     |
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          This bill may meet the criteria for referral to the Suspense  

          Summary: SB 1157 would extend the lead assessor methodology to  
          value certificated aircraft for one additional year, through  
          fiscal year 2016-17.

                 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  


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               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  

                 BOE's costs to implement the bill would be minor and  

          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  
          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  

          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  


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          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  


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          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.  

          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.

          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. 

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