BILL ANALYSIS                                                                                                                                                                                                    

                             Senator Ricardo Lara, Chair
                            2015 - 2016  Regular  Session

          SB 357 (Hall) - Private railroad car tax
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          |Version: February 24, 2015      |Policy Vote: GOV. & F. 7 - 0    |
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          |Urgency: No                     |Mandate: No                     |
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          |Hearing Date: April 27, 2015    |Consultant: Robert Ingenito     |
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          This bill meets the criteria for referral to the Suspense File.

          Bill Summary: SB 357 would (1) change the tax calculation  
          methodology on private railroad cars (PRCs) as specified, and  
          (2) modify the depreciation schedules used to assess the  
          valuation of individual PRCs. 

          Fiscal Impact: 
                 The Board of Equalization (BOE) indicates that this  
               measure would result in an annual General Fund revenue loss  
               of $507,000 million. 

                 The bill would eliminate BOE's need to purchase  
               replacement software to maintain the current-law  
               calculation methodology. Thus, the bill would result in an  
               avoidance of this one-time cost of about $500,000.  
               Additionally, the bill would eliminate BOE's need to  
               continue the current $13,000 annual railroad car  
               registration subscription to verify the days that rail cars  
               are present in the State. 


          SB 357 (Hall)                                          Page 1 of  

          Background: The Private Railroad Car Tax program values and  
          assesses railroad cars not owned by railroad companies, but  
          operated on railway lines within California. This is the only  
          property tax administered and collected by the State.  
          Specifically, current law imposes a property tax on PRCs  
          operating on the State's railroads, and dictates specifies the  
          methodology to value them. BOE determines value based on  
          acquisition cost less depreciation for each railroad car class  
          in the owner's fleet; current law permits additional deductions  
          in the form of depreciation for cars purchased used and  
          improvements to existing cars. This tax base is subsequently  
          multiplied by the tax rate (the average statewide property tax  
          rate), determined by BOE's Research and Statistics Section.

          Because PRCs are involved in interstate travel, the value  
          calculation must be apportioned among the states. PRCs are taxed  
          on a proportional basis consistent with actual presence in  
          California. Current law requires presence to be measured by the  
          number of "car-days" each car class spent in the State during  
          the preceding calendar year.

          Each month, five railroad car companies report border crossing  
          data (movements in and out of California) to BOE, whose software  
          (1) processes this data, and (2) determines the number of days  
          each car was physically present in California during the  
          calendar year immediately preceding each lien date. However, as  
          referenced above, the software that BOE uses to measure  
          "car-days" is nearing the end of its useful life. 


          SB 357 (Hall)                                          Page 2 of  
          Proposed Law:
                 The bill would modify the ratio used to calculate the  
               base of the Private Railroad Car Tax. Specifically, instead  
               of multiplying the adjusted value of the car by the ratio  
               of the amount of days in service in California over the  
               total days in service, the bill changes the ratio to the  
               mileage in the state over total mileage.

                 The bill would prohibit the car's age at acquisition  
               from being used to calculate depreciation, 

                 The bill would provide that improvements to the car  
               cannot be depreciated.

          Legislation:  AB 2262 (Frazier, 2014) was identical to this  
          bill; it was held on this Committee's suspense file.
          Staff Comments: This bill could result in administrative  
          efficiency gains for both PRC owners and BOE. A mileage-based  
          system to calculate the Private Railroad Car Tax would conform  
          to the methodology used by all other states that impose such a  
          tax, making compliance easier for owners. Additionally, BOE  
          notes that a mileage-based system is less complex and costly for  
          it to administer. 

          The estimate of annual revenue loss from this bill appears to be  
          volatile. For instance, BOE's current estimate of the annual  
          loss from SB 367 is considerably lower than the $1.2 million  
          estimate that accompanied AB 2262. BOE's revenue estimation  
          methodology uses collected mileage data from companies that  
          comprise roughly three-fifths of total taxes imposed and then  
          extrapolates to the remainder of the population. A reporting  
          error was a contributing factor to 2014's estimate of higher  
          revenue loss. Complicating the calculation further is the fact  
          that the revenue estimate depends on two other variables: the  
          aforementioned private rail car tax rate, and an adjustment to  
          comply with the requirements of current federal law (the  
          Railroad Revitalization and Regulatory Reform Act). This bill's  
          estimated revenue loss of roughly $500,000 represents an average  
          over a long-run period. However, the revenue loss is 2015-16  
          could be higher if recent delays at the State's ports cause PRCs  


          SB 357 (Hall)                                          Page 3 of  
          to be physically in the State longer than would have happened on  
          the natural. 

          The methodological changes proposed by the bill would not impact  
          the assessments of individual companies in a uniform way.  
          Instead, most companies would benefit from the proposed changes,  
          but others could see assessments increase.