BILL ANALYSIS Ó
SENATE COMMITTEE ON APPROPRIATIONS
Senator Ricardo Lara, Chair
2015 - 2016 Regular Session
SB 480 (Pan) - Taxation: qualified heavy equipment
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|Version: April 29, 2015 |Policy Vote: GOV. & F. 4 - 2 |
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|Urgency: No |Mandate: Yes |
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|Hearing Date: May 11, 2015 |Consultant: Robert Ingenito |
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This bill meets the criteria for referral to the Suspense File.
Bill
Summary:, SB 480 would (1) impose a 0.75 percent tax on a renter
of qualified heavy equipment (QHE) in lieu of business personal
property tax, and (2) require the Board of Equalization (BOE) to
administer the proposed tax.
Fiscal
Impact:
BOE would incur significant annual costs, in the
hundreds of thousands of dollars minimally, to establish
and administer the QHE tax (General Fund). Newly imposed
duties would include taxpayer identification, notification,
and registration; regulation development; manual and
publication revisions; tax return design; computer
programming; return, payment, and refund claim processing;
audit and collection tasks; staff training; and public
inquiry responses.
BOE estimates that the 0.75 percent tax on heavy
equipment would result in a revenue gain in 2016-17 of $21
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million. The measure would also result in an increase in
sales and use tax revenues of $1.8 million, about half of
which would be General Fund. Thus, the bill would result in
total new revenues of $22.8 million ($21.9 million General
Fund).
The Legislative Analyst's Office (LAO) estimated in 2013
(based on 2011 data) that foregone property tax would
likely be between $20 million and $25 million; this amount
would likely increase by 2016-17. To the extent that new
revenues from the QHE tax did not offset the foregone
property tax revenue, General Fund costs would increase
pursuant to Proposition 98.
Likely additional state-mandated costs to reimburse
local jurisdictions related to county auditors.
As currently drafted, the bill's sunset date would lead
to heavy equipment escaping taxation in 2026-27 (see Staff
Comments).
Background: Current state law provides that all property is taxable unless
explicitly exempted by the Constitution or federal law. The
Constitution limits the maximum tax rate on real property at 1
percent of full cash value, and precludes reassessment unless
the property is newly constructed or changes ownership,
assessors value personal property each year. The Constitution
specifically allows the Legislature to exempt or change the
differential taxation of personal property by 2/3 vote. In 1980,
the Legislature exempted all business inventories from the
property tax, defined as items generally held for sale or lease
in the ordinary course of business. In 2014, the Legislature
exempted property used in space flight from the personal
property tax (AB 777, Muratsuchi). Additionally, the
Legislature has enacted taxes in-lieu of the personal property
tax, such as the Vehicle License Fee for vehicles, and the
Private Railroad Car Tax. This is typically done in response to
the difficulties of locally assessing certain kinds of property.
California school districts receive general purpose funds known
as a "revenue limit," through a mix of local property taxes and
state aid. A popular analogy for school district financing in
California is a bucket: local property taxes fill the bucket
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first, and then the state General Fund fills up the remainder.
For most districts, every dollar they receive is one less than
the State has to spend. However, some districts, known as
"basic aid" or "excess tax" districts, fund their revenue limit
entirely through property taxes, and receive no general purpose
state aid. Basic aid districts also retain any excess property
taxes within their district. Property taxes fill these
"buckets" entirely, so another dollar in additional property tax
revenue doesn't fiscally benefit the State.
Proposition 13 (1978) reduced local property tax revenues by
imposing a statewide property tax rate cap of one per cent, plus
any rates necessary to repay previously approved bonded
indebtedness, and limiting reassessment only to new construction
and changes in ownership. While the prior system allowed each
local jurisdiction to impose its own property tax rate that
applied to each parcel within its taxing jurisdictions, the
initiative forced the Legislature to restructure property tax
allocation in a one per cent world. The Legislature
restructured the allocation of property taxes, basically
freezing each agency's share of countywide taxes as of 1975-76.
Since then, the Legislature has shifted local property taxes
from other local agencies to schools to provide General Fund
relief. In both 1992-93 and 1993-94, the Legislature
permanently shifted property tax revenues from local governments
to each county's Educational Revenue Augmentation Fund (ERAF) to
fund schools, saving the General Fund billions. The Legislature
again made ERAF shifts in 2004-05. The Legislature also enacted
two more complex fiscal arrangements - the "VLF-property tax
swap" and the "triple-flip" - which shifted funds from ERAF to
non-school local agencies to compensate for other state funding
reductions. In 2004, voters approved Proposition 1A, which
limited the Legislature's authority to affect local finances,
including a prohibition on shifting property taxes from local
agencies to schools; however, the Legislature can shift property
taxes between non-school local agencies by 2/3 vote.
The heavy equipment rental industry generally makes short-term
leases of equipment to contractors for use in construction. The
term "heavy equipment" includes bulldozers, trucks, cranes, and
earthmoving equipment, as well as excavators, asphalt rollers,
tunneling and drilling equipment, heating, ventilation, air
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conditioning, power generation, safety, and lighter equipment.
Most equipment is rented to construction contractors for use in
complex construction projects, generally for short periods of
time, and contactors often use rental equipment to augment
equipment they already own. The LAO has noted that the heavy
equipment market is highly competitive; numerous nationwide
firms compete in regional markets with smaller, independent
rental companies, and no single company controlling a
substantial market share. In addition, most contracts allow the
contractor to determine the end of the rental period by simply
returning the equipment to the renter, instead of rental
agreements of fixed periods.
As personal property, the county assessor must value a rental
company's equipment each year at fair market value, generally
based on its adjusted cost as reported by the taxpayer on its
business personal property statement. However, whether rental
equipment is considered taxable property or exempt inventory
depends entirely on its physical location on January 1st of each
year: if the taxpayer hasn't rented the equipment as of the lien
date of January 1st, the equipment is considered exempt
inventory, and isn't taxed for the subsequent year. However, if
the property is rented, it is taxable for the next year; the LAO
estimates that 60 percent to 75 percent of all equipment is
considered rented. One exception to the above rule is that
under a long-term lease of six months or more, the equipment
becomes assessable to the renter. Another county assessor may
need to then value the equipment if the renter uses the
equipment in a different county.
Proposed Law:
This bill would do all of the following:
Beginning on January 1, 2016, the bill would impose a
tax on a qualified heavy equipment renter equal to 0.75
percent of the rental price, as defined, payable each
quarter to BOE. Renters would register with BOE, and
supply information and remit payment, as specified.
Qualified renters' principal business must be the rental of
qualified equipment (meaning 50 percent or more of gross
receipts derive from these rentals), and engaged in a line
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of business described in North American Industrial
Classification System Code 532412. The tax would only
apply to leases of unspecified terms, or specified terms
less than 365 days per year.
The bill's tax would be in lieu of the personal property
tax, commencing in the 2016-17 year. However, the owner of
the rental equipment would continue to pay real property
tax as well as property taxes on all its personal property
that isn't qualified heavy equipment.
The bill would shift local property taxes from schools
to other local agencies to compensate for the exemption,
according to amounts local agencies previously received
from heavy equipment rentals. Specifically, beginning in
2016-17, each county auditor must compute a "qualified
heavy equipment reimbursement amount," equal to the total
amount of local property taxes received in the 2014-15 year
by all non-school local agencies from renters of heavy
equipment. The auditor then would shift an amount equal
to the reimbursement amount from ERAF to non-school local
agencies, allocated in proportion to each agency's
traditional share. If the county doesn't have sufficient
ERAF balances to shift the full reimbursement amount, the
auditor must reduce property tax revenues to any K-12 basic
aid school districts in the county, again according to
each's traditional share. The auditor then shifts property
taxes from non-basic aid districts until the entire
reimbursement amount has been completely shifted if the
first two steps didn't result in fully reallocating the
entire reimbursement amount, again according to each's
traditional share.
Related
Legislation: AB 2114 (Pan, 2014) proposed a similar tax, and the
Assembly Appropriations Committee held the bill. 2013's AB 1055
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(Pan) and 2012's AB 1941 (Ma) also proposed a similar tax. Both
of these bills were held by the Assembly Revenue and Taxation
Committee.
Staff
Comments: As noted above, the county assessor determines
taxability each year (generally on the January 1 lien date), and
property tax assessment occurs on that date. Under this bill,
the heavy equipment rental tax would end on July 1, 2026, but
the lien date for personal property tax would be January 1, 2027
(since the heavy equipment rental tax provisions repeal on
January 1, 2027). Therefore, for fiscal year, 2026-27, neither
the proposed heavy equipment rental tax nor the personal
property tax would apply. Assuming ten years of growth, the
revenue loss could be as high as $35 million.
In previous versions of this bill, BOE's calculated revenue gain
from the 0.75 percent tax was considerably less than LAO's
estimate of the foregone property tax revenues. BOE's
methodology begins by using relevant data (receipts from heavy
equipment rentals) from the U.S Economic Census, which is
updated every five years. SB 480 represents the first time data
from the 2012 U.S. Economic Census was available, and the
revised data showed higher such heavy equipment rental receipts,
thereby increasing BOE's revenue estimate by about $5 million.
Given that the LAO's estimate of revenue loss was from a 2013
publication, and relied on data from 2011, foregone property tax
revenues in 2016-17 would likely be in excess of the $25 million
upper bound of the LAO's published estimate. Thus, while the
revenue shortfall is less than previous iterations of this bill,
it appears that SB 480 is likely not completely revenue neutral.
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