BILL ANALYSIS                                                                                                                                                                                                    

                         Senator Robert M. Hertzberg, Chair
                                2015 - 2016  Regular 

          |Bill No:  |SB 357                           |Hearing    |4/8/15   |
          |          |                                 |Date:      |         |
          |Author:   |Hall                             |Tax Levy:  |No       |
          |Version:  |2/24/15                          |Fiscal:    |Yes      |
          |Consultant|Grinnell                                              |
          |:         |                                                      |

                               PRIVATE RAILROAD CAR TAX

          Changes the apportionment method for calculating the private  
          railroad car tax.  

           Background and Existing Law

           Section One of Article XIII of the California Constitution  
          provides that all property is taxable unless explicitly exempted  
          by the Constitution or federal law.  While locally elected  
          county assessors establish a value for most real and personal  
          property, Section 19 requires the Board of Equalization (BOE) to  
          assess property owned by regulated railroads, except franchises,  
          to the same extent and in the same manner as other property.   
          However, owners of private rail cars that aren't owned by  
          railroads pay the "Private Railroad Car Tax," a tax similar to  
          the Vehicle License Fee as both are paid in-lieu of the property  
          tax.  The Private Railroad Car Tax is the only property tax that  
          flows to the state's General Fund, where it supplies  
          approximately $8 million annually.  

          Private railroad cars transport freight, and aren't owned by  
          railroads, which are centrally assessed by BOE, and pay the  
          property tax.  According to BOE, private rail cars are more  
          specialized than general freight cars owned by railroads, and  
          include oil tanks and refrigerated cars.  Additionally, the  
          private rail car industry is fairly concentrated: of 220 private  


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          rail car taxpayers, 20 companies control 90% of the market, and  
          10 companies control 80%.

          The base of the tax is the acquisition cost of the cars by class  
          in the owner's fleet, minus depreciation at a maximum of 80%  
          over 22 years for most cars in specified categories, 25 years  
          for those that don't fit a specific category, plus depreciation  
          for improvements the owner makes to the cars.  Because states  
          are bound by federal law when imposing taxes on interstate  
          commerce, the fleet value must be apportioned based on some  
          measurement of its activities in a state.  In this case, state  
          law directs the value of the fleet to be apportioned by  
          multiplying it by the average number of days it's physically  
          present in the state in the last calendar year.  The apportioned  
          tax base is then multiplied by the tax rate, equal to the  
          average property tax rate in the state, to calculate tax.  

          Currently, BOE's information technology system for calculating  
          the car-day count method for assessing the tax is nearing the  
          end of its useful life.  BOE would need to procure new software  
          soon to continue to measure the tax under the current method.   
          Additionally, BOE must pay a service approximately $13,000 per  
          year to verify private rail car taxpayers' accounting of car  
          days.  BOE and the private railroad car industry want to change  
          the method for measuring the tax to account for the miles  
          travelled for each car instead of accounting for the average  
          number of days that class of rail cars owned by the taxpayer is  
          in service in California.

           Proposed Law

           Senate Bill 357 changes the base of the Private Railroad Car Tax  
          in three ways:

                 First, the bill changes the apportionment method for the  
               tax.  Instead of multiplying the adjusted value of the car  
               by the ratio of the average amount of days in service in  
               California over the total days in service, the bill changes  
               the ratio to the average mileage in the state over total  

                 Second, SB 357 prohibits the car's age at acquisition  
               from being used to calculate depreciation.


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                 Lastly, the measure provides that improvements to the  
               car can't be depreciated.

          The measure also makes conforming changes to the law.

           State Revenue Impact

           According to BOE, SB 357 results in revenue losses to the state  
          of approximately $507,000 annually.


           1.  Purpose of the bill  .  According to the author, "The Ports of  
          Los Angeles and Long Beach are responsible for moving  
          approximately 7 million cargo containers in and out of the  
          United States each year and represent close to 40% of the  
          nation's imports.  Private Railroad Cars (PRC) are the most  
          widely used method to move goods from California's ports to  
          consumers throughout California, the nation and the world.   
          Current law imposes a property tax on PRCs operating on the  
          state's railroads based on their time spent in California, not  
          on the distance a PRC travels (as used in other states).  The  
          current calculation of PRC property tax relies heavily on an  
          outdated data system and does not accurately reflect  
          standardized modern assessments placed on cargo as it moves  
          throughout the state.  This system makes it more difficult to  
          accurately report and collect assessments, increasing oversight  
          costs to the State Board of Equalization (BOE) and PRC owners.   
          SB 357 modernizes the way the BOE collects assessments on PRCs  
          from the number of days spent in the state to the number of  
          miles traveled within the state.  By using a mileage based  
          assessment, BOE administration costs will be reduced and  
          businesses will be able to use a consistent, reliable and  
          standardized method to pay assessments just as they do in other  
          states throughout the country."

            2.   Free ride  ?  SB 357 simplifies the method for assessing the  
          private railroad car tax, as BOE would need only to verify the  
          mileage any car travelled instead of measuring the average days  
          a class of cars spending in service in the state.  Additionally,  


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          the bill would delete BOE's need to replace old information  
          technology, thereby creating savings for the state.  However,  
          while changing from one method to another may shift the burden  
          between taxpayers within the private rail car industry; the bill  
          enacts an aggregate $500,000 tax cut for the industry as a  
          whole.  Instead, the measure could include an assessment factor  
          or other provision that ensures that the state doesn't lose any  
          revenue as a result of the method change.  The Committee may  
          wish to consider whether the change in the method of assessing  
          the private railroad car tax should result in a net revenue  
          loss, or whether some assessment factor is necessary to ensure  
          revenue neutrality.

          3.   Not so fast  .  While antiquated and unique, there are some  
          policy reasons to maintain the current system for apportioning  
          the value of private rail cars for tax purposes.  First, the  
          current apportionment methodology accounts for the number of car  
          days in the state, which measures the time a car spends idle,  
          where public safety services are needed to protect it from  
          vandalism.  A mileage-based system wouldn't account for this  
          increase in the demand for public services.  Additionally, a  
          mileage based system assumes that a car's value is entirely  
          based on its capacity to move cargo, as mileage as a percentage  
          of the whole is the sole variable that matters.  The current  
          system allows a terminal state such as California to capture the  
          value of the rail car's time spent unloading and loading cargo.   

          4.   Do it again  .  SB 357 is identical to AB 2262 (Frazier,  
          2013), which the Committee approved unanimously last year.  The  
          Senate Appropriations Committee held the measure on its suspense  

           Support and  
          Opposition   (4/9/15)

           Support  :  State Board of Equalization; BOE Member George Runner;  
          California Taxpayers' Association; Railway Supply Institute; TTX  

           Opposition  :  Unknown.


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