BILL ANALYSIS Ó SENATE COMMITTEE ON APPROPRIATIONS Senator Ricardo Lara, Chair 2015 - 2016 Regular Session SB 1329 (Hertzberg) - Property taxation: certificated aircraft ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: April 26, 2016 |Policy Vote: GOV. & F. 5 - 0, | | | JUD. 4 - 2 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: Yes | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: May 16, 2016 |Consultant: Robert Ingenito | | | | ----------------------------------------------------------------- This bill may meet the criteria for referral to the Suspense File. Bill Summary: SB 1329 would (1) extend for five years the existing methodology for valuing certificated aircraft, excluding a 10 percent fleet reduction discount, and (2) permit trial de novo for suits for refunds of locally-assessed property taxes on certificated aircraft. Fiscal Impact: The aggregate fiscal impact of this bill is unknown and subject to considerable uncertainty. First, the bill's removal of the 10 percent fleet reduction discount would increase revenue by an unknown amount, up to several million dollars annually. Next, the bill's extension of "trial de novo" provisions to property tax refund litigation involving certificated aircraft could lead to court-determined property tax reductions of an unknown amount that potentially exceed the aforementioned revenue increase. Changes in local property tax SB 1329 (Hertzberg) Page 1 of ? revenues, in turn, affect General Fund Proposition 98 spending by up to roughly 50 percent (the exact amount depends on the specific amount of the annual Proposition 98 guarantee, which in turns depends upon a variety of economic, demographic and budgetary factors. Ultimately, the bill could result in an increase or a decrease in annual General Fund spending through 2021-22 relative to current law (See Staff Comments). Finally, the Board of Equalization (BOE) would incur minor and absorbable costs related to updating publications and its internet site, and possible witness subpoenas or amicus briefs related to litigation over valuation issues as a result of the bill. Background: All property, real and personal, is subject to property tax, unless a specific constitutional or statutory exemption applies. 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, county assessors value personal property, such as certificated aircraft, annually. The Legislature first directed county assessors in 1850 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. As a response, the California Constitution of 1879 created BOE to equalize property tax rates and assessment practices among counties. In 1910, voters amended the Constitution to direct BOE to tax certain property that crossed county lines, including that owned by railways, firms selling gas and electricity, or telephone companies. The taxes were exclusively levied for state purposes on a gross receipts taxation basis. In 1933, the constitution was amended again and the 'in lieu" gross receipts taxation on public utilities was substituted with the ad valorem assessment by BOE that was allocated to the local jurisdictions according to situs. Valuing Certificated Aircraft. 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, SB 1329 (Hertzberg) Page 2 of ? which becomes the taxable value of the property for the fiscal year. Certificated aircraft used by air carriers is subject to property tax when in revenue service in the State. Assessors may only value certificated aircraft (defined as aircraft operated by a domestic or foreign air carrier engaged in passenger or fleet service) with "situs" in California on a fleet basis. This means that the assessed value basis is not the value of any single aircraft owned by an air carrier, but rather the value of all aircraft of each type that is flown into the State. Aircraft regularly fly in and out of California and the various California counties with major airports; typically no single or particular aircraft remains located in the State on a permanent basis. Under the "fleet" concept, aircraft types that have gained situs in California by their entry into revenue service in this state are valued as a fleet, while only an allocated portion of the entire fleet's value is ultimately taxed to reflect actual presence in California's counties. For example, assessors must value an airlines' entire A380 fleet if only one enters the State, but doesn't value any of its 747's if none of them do so, regardless of the total number or value of A380s or 747s the airline owns. Once assessors calculate value, they must apportion it among counties based on a weighted average of (1) the fleet's ground and flight time (75 percent), and (2) arrivals and departures (25 percent) measured only during the "representative period," currently designated by BOE as one full week in January, with the selected week varying. This apportioned fleet value is then multiplied by the appropriate rate for the tax rate area in that county. Prior to January 1, 1999, California law did not specify an assessment methodology for valuing certificated aircraft, or for valuing the carrier's taxable possessory interest in the publicly owned airport in which the aircraft operated. In 1997-98, a group of counties and air carrier industry representatives met to resolve property tax issues associated with air carrier-owned and -used property. The end result was a written settlement agreement to dispose of outstanding litigation and appeals over the valuation of airport possessory interest assessments and certificated aircraft. The Legislature codified the settlement agreement in a three-piece package: SB 1329 (Hertzberg) Page 3 of ? Aircraft Valuation Methodology and Monetary Settlement. AB 1807 (Takasugi, Chapter 86, Statutes of 1998) outlined the valuation procedures for certificated aircraft until 2003 and provided $50 million in tax credits against future tax liabilities, as well as extensive uncodified legislative findings and declarations. Airport Possessory Interests. AB 2318 (Knox, Chapter 85, Statutes of 1998) specified the assessment methodology for valuing the air carrier's taxable possessory interest in publicly-owned airports. Tax Credits. SB 30 (Kopp, Chapter 87, Statutes of 1998) added general purpose provisions to allow counties and taxpayers to enter into written settlement agreements granting taxpayers tax credits. In 2003, the agreement expired, and assessors again locally valued aircraft without specific guidance from state law. In 2006, assessors and the airlines again agreed on a new valuation methodology (AB 964, Horton, Chapter 699, Statutes of 2005), and directed a "lead assessor" to value each airline's fleet. Instead of filing property statements with each county, airlines filed a single consolidated statement with a single assessor designated by the Aircraft Advisory Subcommittee of the California Assessors' Association, which rotates generally every three years. AB 964 established categories for various types of aircraft (passenger aircraft and freighter 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 SB 1329 (Hertzberg) Page 4 of ? sale/leaseback or assignment of purchase rights, or aircraft acquired in bankruptcy, with specified adjustments, or 10 percent off (for a fleet adjustment) on the wholesale prices listed in the "Airliner Pricing Guide," If the APG ceases to exist, BOE determines the guide or adjustment. AB 964 also included an adjustment factor to account for economic obsolescence, where assessors analyze the change in three variables to determine whether larger economic forces are diminishing the aircraft's value. 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. Next, the assessor 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. In 2009, AB 311 (Ma), as introduced, would have made the valuation methodology and centralized provisions permanent and, as amended, would have extended the effective date. However, Governor Schwarzenegger vetoed the bill because one airline disagreed with extending the valuation methodology, and the timing of AB 964's sunset allowed another year for all the parties to reach consensus. The Governor signed a similar bill the following year (AB 384, Ma, 2010). AB 384 extended the lead assessor model and the valuation methodology until 2015-16, but differed from AB 311 by (1) replacing language specifying value with a rebuttable presumption (previously, the methodology-produced value was deemed to be the aircraft's fair market value), (2) allowing the taxpayer to rebut the presumption with appraisals, invoices, and expert testimony, and SB 1329 (Hertzberg) Page 5 of ? (3) allowing aircraft to be valued lower than the APG guide value by capping an aircraft's value at its original cost. The maximum value cap provision was added to appease the airline that opposed AB 311 in the prior year. In calculating total fleet values, this provision requires the county to substitute the original price paid when it is lower than wholesale price less 10 percent for any individual aircraft in the fleet. This reduces the total fleet value for any airline able to purchase new planes at deeper discounts. In 2015, the Legislature enacted AB 1157 (Nazarian), which extended the sunset date of the lead county methodology by one year, through 2016-17. Thus, under current law absent legislation, beginning in 2017-18 each county would once again value certificated aircraft based on its fair market value without statutory guidance. Trial De Novo. Under current law, in a refund action for locally assessed property taxes, where the issue is a question of law, the taxpayer has a right to a trial de novo; the court is able to receive and consider new evidence. However, where the issue is a question of fact, the court is restricted to a review of the assessment appeals board findings and decisions (i.e., the administrative record). With respect to factual issues, the superior court's level of review is limited to determining whether "substantial evidence" in the record exists to support the appeals board's decision. Thus, taxpayers seeking to appeal an assessor's valuation of locally-assessed property generally contact the assessor initially informally to request a reconsideration of the value. If this avenue proves unsuccessful, taxpayers begin the formal appeal process (which can include a claim for refund) with the county's board of equalization (i.e., the assessment appeals board). For taxes on locally-assessed property, the Constitution places the appellate authority for locally-assessed property taxes with the county board of equalization, and requires this appeals board to equalize the value of all property by adjusting individual assessments. Seventeen county boards of supervisors, primarily smaller counties, hear appeals directly, sitting as the county board of equalization, while all other county boards SB 1329 (Hertzberg) Page 6 of ? of supervisors create one or more assessment appeals boards to perform the quasi-judicial role to hold a hearing to determine value of the taxpayer's property when there is a dispute. Assessment appeals board members must complete a training program, and possess five years' professional experience in California as a certified public accountant or public accountant, licensed real estate broker, attorney, or property appraiser. However, in smaller counties, someone "possessed of competent knowledge of property appraisal and taxation," can be appointed by board of supervisor members without professional experience. Taxpayers who continue to disagree with the assessment appeal board's value after the appellate process can file suit in Superior Court within six months of the board's final determination; however, for suits that aren't posing a question of law, the court can only review the existing administrative record to determine whether substantial evidence supports the appeals board's decision, and cannot substitute its own independent judgment. In these cases, the trial court generally acts as the appellate court, and only grants review for "arbitrariness, abuse of discretion, or failure to follow the standards prescribed by the Legislature," as they see the county assessment appeals process as performing the same fact-finding functions as trial courts. In contrast, current law provides state assessees with a right to a trial de novo in a suit for the refund of state-assessed property taxes. In these refund actions, the trial court is not restricted to a "substantial evidence" review of the administrative record, but is required to consider all admissible evidence relating to the valuation of the subject property. This law requires the trial court to base its decision on the "preponderance of the evidence" before it. In the case of local-assessee refund actions, the courts are required to give these cases special precedence. However, in the case of state-assessee actions seeking a refund of property taxes, courts are not required to give precedence to these actions over all other civil actions in the matter of setting for hearing or trial, unless special precedence is granted by another section of law. SB 1329 (Hertzberg) Page 7 of ? Proposed Law: This bill would extend for five fiscal years (through 2021-22) the commercial air carrier administrative provisions (the extension of the lead county methodology), otherwise set to expire, with one exception: the removal of the provision that allows a 10 percent fleet discount from the Airliner Price Guide and a related adjustment for aircraft that is less than two years old. Additionally, the bill would extend the current state assessee "trial de novo" provisions to a suit for the refund of locally assessed property taxes exclusively for commercial air carriers. Specifically, the trial court "may not be restricted to the administrative record, but shall consider all the evidence relating to the valuation of the property admissible under the rules of evidence. The court shall base its decision upon the preponderance of the evidence." The bill would repeal these trial de novo provisions on January 1, 2022, consistent with the sunset of the aircraft assessment valuation methodology and the lead county system. These airline-related suits would not be given precedence in the court scheduling. Related Legislation: Among other things, AB 2622 (Nazarian) also proposes to extend the sunset date for the certificated aircraft assessment methodology and lead county system. That bill extends the provisions for three more fiscal years. The bill is currently in the Assembly Appropriations Committee. Staff Comments: BOE indicates that in 2015-16, counties reported certificated aircraft valuation totaling $8.0 billion. Thus, at the basic one percent property tax rate, local property tax revenues were $80 million. The bill's removal of the 10 percent fleet discount reduction would lead to an increase in assessed valuation, and in turn, an increase in property tax revenue. The magnitude of the increase, however, is unknown. The reason for this is, to the extent that airlines exert monoposy power when purchasing aircraft from manufacturers such as Boeing, it is possible that they could negotiate a price below "the wholesale price listed in the Airliner Price Guide less 10 percent". In other words, they may make their purchases at a price such they cannot take the full 10 percent discount that the bill proposes to remove. Thus, the upper bound of the annual increase in property tax revenue would be $8 million. SB 1329 (Hertzberg) Page 8 of ? The bill's extension of "trial de novo" provisions to property tax refund litigation involving certificated aircraft would have an unknown impact on aircraft assessments and resulting property tax revenue. Because under trial de novo, the court shall consider "all evidence," it is possible that the court would determine an assessed value higher than what was determined by the local assessor. More likely, however, the court could determine assessed value to be lower than that calculated by an assessor. Thus, the specific revenue impact of the bill's proposed provisions relative to current practice (the lead county system) cannot be determined. However, under the rules of this Committee, the bill's revenue impacts must be scored relative to current law, not current practice. As was discussed previously, the lead county system under current law is scheduled to sunset at the end of 2016-17. Consequently, the Committee must compare the estimated revenue impacts of the bill vis-à-vis what certificated aircraft assessments and resulting property tax collections would be if the lead county system expired and assessors instead resumed valuing certificated aircraft based on its fair market value without statutory guidance. Because total property tax revenue under that regime is unknown, estimating the revenue impact of this bill cannot be done with any degree of certainty. Likewise, because of the linkage between local property taxes and General Fund Proposition 98 spending, the impact of this bill on state spending is unknown. -- END -- SB 1329 (Hertzberg) Page 9 of ?