BILL ANALYSIS Ó SENATE COMMITTEE ON APPROPRIATIONS Senator Ricardo Lara, Chair 2015 - 2016 Regular Session SB 480 (Pan) - Taxation: qualified heavy equipment ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: April 29, 2015 |Policy Vote: GOV. & F. 4 - 2 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: Yes | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: May 11, 2015 |Consultant: Robert Ingenito | | | | ----------------------------------------------------------------- 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 SB 480 (Pan) Page 1 of ? 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 SB 480 (Pan) Page 2 of ? 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 SB 480 (Pan) Page 3 of ? 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 SB 480 (Pan) Page 4 of ? 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 SB 480 (Pan) Page 5 of ? (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. -- END --