BILL ANALYSIS Ó
SENATE COMMITTEE ON APPROPRIATIONS
Senator Ricardo Lara, Chair
2015 - 2016 Regular Session
SB 661 (Hill) - Property taxation: state assessment:
commercial air carrier personal property
-----------------------------------------------------------------
| |
| |
| |
-----------------------------------------------------------------
|--------------------------------+--------------------------------|
| | |
|Version: April 13, 2015 |Policy Vote: GOV. & F. 7 - 0 |
| | |
|--------------------------------+--------------------------------|
| | |
|Urgency: No |Mandate: No |
| | |
|--------------------------------+--------------------------------|
| | |
|Hearing Date: May 11, 2015 |Consultant: Robert Ingenito |
| | |
-----------------------------------------------------------------
This bill meets the criteria for referral to the Suspense File.
Bill
Summary: SB 661 would transfer assessment of airline personal
property from local assessors to the Board of Equalization
(BOE).
Fiscal
Impact:
BOE would incur substantial costs to implement the
provisions of the bill. Preliminary figures are still
pending, but will likely be in the low millions of dollars
annually (See Staff Comments).
Conceptually, this bill should be revenue neutral.
SB 661 (Hill) Page 1 of
?
However, if BOE's assessment was lower than the aggregated
amount that would have been calculated at the local level,
General Fund spending would increase pursuant to
Proposition 98. Conversely, if BOE's assessment was higher
than what would have been calculated at the local level,
General Fund spending would decrease. (See Staff Comments).
Background: Current law provides that all property is taxable unless
explicitly exempted either by the Constitution or federal law.
The Constitution limits the maximum amount of any ad valorem tax
on real property at 1 percent of full cash value, and precludes
reassessment unless the property is newly constructed or changes
ownership; in contrast, assessors value personal property each
year.
In 1850, the Legislature first directed county assessors to tax
property; however, assessors in different counties often applied
different tax rates and methods of assessment; the
inconsistencies were especially acute between counties dominated
by mining and agriculture. In 1879, BOE was created to equalize
rates and assessment practices among counties. In 1910, voters
amended the Constitution to direct BOE to value property that
crossed county lines, such as that owned by railways, companies
selling gas and electricity, or telephone companies.
Generally, assessors value business personal property, such as
aircraft, by multiplying the taxpayer's cost of acquiring it by
an inflation adjustment to estimate the cost to replace the
property at current market prices. This "reproduction cost new"
is then multiplied by a "percent good factor" (a depreciation
factor) to provide an estimate of the depreciated reproduction
cost of the property, which becomes the taxable value of the
property for the fiscal year.
Assessors may only value certificated aircraft with "situs" in
California on a fleet basis. For example, assessors must value
an airlines' entire A380 fleet if only one enters the state, but
doesn't include any of its 747's if none of them do, regardless
of the total number or value of A380s or 747s an airline owns.
Once assessors calculate value, they must apportion it among
counties based on a weighted average of (1) the fleet's ground
SB 661 (Hill) Page 2 of
?
and flight time (75 percent) and (2) arrivals and departures (25
percent) measured only during the "representative period,"
currently designated by BOE as the second full in week in
January. This apportioned fleet value is then multiplied by the
appropriate rate for the tax rate area in that county.
Until 1998, state law did not prescribe a specific method for
assessors to determine the value of aircraft, resulting in years
of disagreements and litigation between assessors and airlines.
In 1998, the Legislature detailed a valuation methodology for
certificated aircraft which was presumed to equal the fair
market value of the aircraft for those years, enacting three
bills to codify a settlement agreement between several counties
and airline industry representatives. In 2003, the agreement
expired, and assessors again locally valued aircraft without
specific guidance from the Revenue and Taxation Code.
In 2006, assessors and the airlines again agreed on a new
valuation methodology (AB 964, Horton), and directed a "lead
assessor" to value each airline's fleet; this new methodology
has a sunset in 2010-11. Instead of filing property statements
with each county, airlines file a single consolidated statement
with a single assessor designated by the Aircraft Advisory
Subcommittee of the California Assessors' Association. The
measure established categories for various types of aircraft,
and set forth a valuation methodology for each. The bill also
directed the lead assessor to audit the airline every four
years. The new methodology provided that the aircraft value was
the lesser of:
A historical cost basis, including transportation and
improvement costs, as well as capitalized interest, with
specific provisions for leased aircraft, aircraft in a
sale/leaseback or assignment of purchase rights, or
aircraft acquired in bankruptcy, with specified
adjustments, or
10 per cent off (for a fleet adjustment) on the
wholesale prices listed in the "Airliner Pricing Guide," If
the APG ceases to exist, the Board of Equalization (BOE)
SB 661 (Hill) Page 3 of
?
shall determine the guide or adjustment.
AB 964 also directed assessors to analyze the cost to determine
whether an economic obsolescence allowance should apply. To
determine economic obsolescence for mainline jets and regional
aircraft, the assessor calculates three factors for both the
previous calendar year and the past ten years: average net
revenue per seat mile, net load factor, and yield. The assessor
then compares each factor's previous calendar year value with
its value for the past ten years to determine the amount of
difference. The assessor then applies a weighted average of the
indicated percentage adjustments: net revenue per available seat
mile (35 percent), net load (35 percent), and yield (30
percent). The assessor must reduce the original cost by the
percentage, but only if the final economic obsolescence exceeds
10 percent.
The methodology set forth in AB 964 was extended until 2015-16
(AB 384, Ma) after AB 311 was vetoed by Governor Schwarzenegger
the previous year. AB 384 but differed from AB 311 by:
Replacing language specifying value with a rebuttable
presumption.
Allowing the taxpayer to rebut the presumption with
appraisals, invoices, and expert testimony, and
Capping an aircraft's value at its original cost.
With AB 384's sunset approaching, certificated aircraft will
revert to local assessment without a lead assessor on January 1,
2016, requiring each assessor where a plane lands to
independently value aircraft. Instead of extending the lead
assessor model, the commercial airline industry wants BOE to
assess its personal property instead, including certificated
SB 661 (Hill) Page 4 of
?
aircraft, due to the burden of complying with the lead assessor
model, and disagreements with assessors over the application of
the economic obsolescence factor.
Proposed Law:
This bill would (1) extend the current lead assessor model one
year to 2016-17, and (2) transfer assessment of personal
property owned by commercial air carriers to BOE beginning in
2017-18. BOE must use the same methodology to establish value
currently used by assessors. BOE would allocate revenue from
assessing this property by situs. BOE must audit commercial air
liners that have assessable personal property with a value of
four hundred thousand dollars or more.
The bill would codify the representative period as the second
full week in January, which was previously designated by BOE in
consultation with assessors.
Staff
Comments: This bill would result in substantial new workload for
BOE, and would result in significant annual new costs to assess
commercial air carrier personal property, hear appeals, and
defend itself in litigation related to potential air carrier
assessment.
Certificated aircraft assessed valuation attributed to
California each year totals approximately $7.9 billion. At the
one percent basic tax rate, this equates to $79 million in
property tax revenue. In theory, the fair market value of
personal property assessed by the BOE would be the same as that
determined by local county assessors, since both agencies are
subject to the same laws and would use the same codified
methodology. However, property appraisal involves a certain
degree of subjectivity. Consequently, is it improbable that
BOE-values would be the same as local county assessor values,
especially in the early years when BOE would be developing staff
expertise that it currently lacks with respect to aircraft
valuation. Given the linkage between local property taxes and
General Fund Proposition 98 spending, any departure between BOE
and county assessors would impact state spending.
SB 661 (Hill) Page 5 of
?
-- END --