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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