BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |SB 1394 |Hearing |4/13/16 |
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|Author: |Hall |Tax Levy: |Yes |
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|Version: |3/28/16 |Fiscal: |Yes |
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|Consultant|Grinnell |
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Private railroad car tax: valuation
Changes the apportionment method for the private railroad car
tax.
Background
Section One of Article XIII of the California Constitution
provides that all property is taxable unless explicitly exempted
by the Constitution or federal law. While locally elected
county assessors establish a value for most real and personal
property, Section 19 requires the Board of Equalization (BOE) to
assess property owned by regulated railroads, except franchises,
to the same extent and in the same manner as other property.
However, owners of private rail cars that aren't owned by
railroads pay the "Private Railroad Car Tax," a tax similar to
the Vehicle License Fee as both are paid in-lieu of the property
tax. The Private Railroad Car Tax is the only property tax that
flows to the state's General Fund, where it generated
approximately $9 million in 2015.
Private rail cars either transport its owner's freight, or are
leased to shippers. According to BOE, private rail cars are
more specialized than general freight cars owned by railroads,
and include oil tanks and refrigerated cars. Additionally, the
private rail car industry is fairly concentrated: of 220 private
rail car taxpayers, 20 companies control 90% of the market, and
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10 companies control 80%.
The tax base is the car's acquisition cost by class in the
owner's fleet, minus depreciation at a maximum of 80% over 22
years for most cars in specified categories, 25 years for those
that don't fit a specific category. Owners can also depreciate
improvements they make to the car, known as "betterments."
Because states are bound by federal law when imposing taxes on
interstate commerce, the fleet value must be apportioned based
on some measurement of its activities in California compared to
its total activity. In this case, state law directs the value
of the fleet to be apportioned by multiplying its value by a
percentage equal to the average number of days it's physically
present in the state in the last calendar year. The apportioned
tax base is then multiplied by the tax rate, equal to the
average property tax rate in the state, to calculate tax.
Currently, BOE's information technology system for calculating
the car-day count method for assessing the tax is nearing the
end of its useful life. BOE would need to procure new software
soon to continue to measure the tax under the current method.
Additionally, BOE must pay around $13,000 per year to verify
private rail car taxpayers' accounting of car days. BOE and the
private railroad car industry want to change the method for
measuring the tax to account for the miles travelled for each
car instead of accounting for the average number of days that
class of rail cars owned by the taxpayer is in service in
California.
Proposed Law
Senate Bill 1394 changes the method of apportionment from the
current system of car days spent in California per year, to an
equally weighted average of car days and mileage for the 2017-18
fiscal year, and sets mileage as the exclusive apportionment
factor for the 2018-19 fiscal year and thereafter.
The measure also deletes references to the class of the car, as
railroads do not report mileage by the class of the car. The
bill also explicitly adds "additions and betterments" into the
value of the car to substitute for the current definition of
acquisition cost as "expenditures required to be capitalized by
general accounting principles."
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State Revenue Impact
According to BOE, SB 1394 results in revenue losses of $1.5
million in 2016-17, and $2.1 million annually thereafter.
Comments
1. Purpose of the bill . According to the author, "The Ports of
Los Angeles and Long Beach are responsible for moving
approximately 7 million cargo containers in and out of the
United States each year and represent close to 40% of the
nation's imports. Private Railroad Cars (PRC) are the most
widely used method to move goods from California's ports to
consumers throughout California, the nation and the world.
Current law imposes a property tax on PRCs operating on the
state's railroads based on their time spent in California, not
on the distance a PRC travels (as used in other states). The
current calculation of PRC property tax relies heavily on an
outdated data system and does not accurately reflect
standardized modern assessments placed on cargo as it moves
throughout the state. This system makes it more difficult to
accurately report and collect assessments, increasing oversight
costs to the State Board of Equalization (BOE) and PRC owners.
SB 1394 modernizes the way the BOE collects assessments on PRCs
from the number of days spent in the state to the number of
miles traveled within the state. By using a mileage based
assessment, BOE administration costs will be reduced and
businesses will be able to use a consistent, reliable and
standardized method to pay assessments just as they do in other
states throughout the country."
2. Free ride ? SB 1394 simplifies the method for assessing the
private railroad car tax, as BOE would need only to verify the
mileage any car travelled instead of measuring the average days
a class of cars spends in service in the state. Additionally,
the bill eliminates BOE's need to replace old information
technology, likely creating savings for the state. However,
while the administrative cost savings are significant, the bill
enacts a large tax cut for the private railcar industry as a
whole. Instead, the measure could include an assessment factor
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or other provision that ensures that the state doesn't lose any
revenue as a result of the method change. The Committee may
wish to consider whether the change in the method of assessing
the private railroad car tax should result in a net revenue
loss, or whether some assessment factor is necessary to ensure
revenue neutrality.
3. Not so fast . While antiquated and unique, there are some
policy reasons to maintain the current system for apportioning
the value of private rail cars for tax purposes. First, the
current apportionment methodology accounts for the number of car
days in the state, which measures the time a car spends idle,
where public safety services are needed to protect it from
vandalism. A mileage-based tax does not account for the costs
necessary to fund these services. Additionally, the system
which SB 1394 would replace allows a terminal state such as
California to capture the value of the rail car's time spent
unloading and loading cargo, whereas under a mileage based tax a
car's value is entirely based on its time spent moving cargo.
4. Do it again . SB 1394 is similar to SB 357 (Hall), which the
Committee approved unanimously last year, but was subsequently
held on the Senate Appropriations Committee suspense file. SB
357 was largely identical to AB 2262 (Frazier, 2014), which the
Committee also approved unanimously, but was also held in Senate
Appropriations Committee's suspense file.
Support and
Opposition (4/7/16)
Support : California Railroad Industry, California Taxpayers
Association, Railway Supply Institute, TTX Company.
Opposition : Unknown
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