BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
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
SB 357 (Hall) 2/24/15 Page 2
of ?
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
mileage.
Second, SB 357 prohibits the car's age at acquisition
from being used to calculate depreciation.
SB 357 (Hall) 2/24/15 Page 3
of ?
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.
Comments
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,
SB 357 (Hall) 2/24/15 Page 4
of ?
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
file.
Support and
Opposition (4/9/15)
Support : State Board of Equalization; BOE Member George Runner;
California Taxpayers' Association; Railway Supply Institute; TTX
Company.
Opposition : Unknown.
SB 357 (Hall) 2/24/15 Page 5
of ?
-- END --