BILL ANALYSIS                                                                                                                                                                                                    Ó





          SENATE COMMITTEE ON APPROPRIATIONS
                             Senator Ricardo Lara, Chair
                            2015 - 2016  Regular  Session

          SB 1394 (Hall) - Private railroad car tax:  valuation
          
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          |Version: March 28, 2016         |Policy Vote: GOV. & F. 6 - 0    |
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          |Urgency: No                     |Mandate: No                     |
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          |Hearing Date: April 25, 2016    |Consultant: Robert Ingenito     |
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          This bill meets the criteria for referral to the Suspense File.


          
          Bill Summary: SB 1394 would modify the apportionment method for  
          the private railroad car tax. 

          Fiscal Impact: 
                 The Board of Equalization (BOE) indicates that this  
               measure would result in a General Fund revenue loss of $1.5  
               million in 2017-18, and $2.1 million annually thereafter. 

                 The bill would eliminate BOE's need to purchase  
               replacement software to maintain the current-law  
               calculation methodology. Thus, the bill would result in an  
               avoidance of a one-time cost of about $500,000.  
               Additionally, the bill would eliminate BOE's need to  
               continue its current $13,000 annual railroad car  
               registration subscription needed to verify the days that  








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               rail cars are present in the State. 
          
          Background: Private Rail Cars (PRCs) either transport the  
          owner's freight, or are leased to shippers. They are more  
          specialized than general freight cars owned by railroads, and  
          include oil tanks and refrigerated cars.  Additionally, the PRC  
          industry is fairly concentrated: of 221 private rail car  
          taxpayers, 10 companies control 80 percent of the market, and 20  
          companies control 90 percent.

          The PRC tax program values and assesses railroad cars not owned  
          by railroad companies, but operated on railway lines within  
          California. This is the only property tax administered and  
          collected by the State. Specifically, current law imposes a  
          property tax on PRCs operating on the State's railroads, and  
          specifies the methodology to value them. BOE determines value  
          based on acquisition cost less depreciation for each railroad  
          car class in the owner's fleet; current law permits additional  
          deductions in the form of depreciation for cars purchased used  
          and improvements to existing cars. This tax base is subsequently  
          multiplied by the tax rate (the average statewide property tax  
          rate).

          Because PRCs are involved in interstate travel, the value  
          calculation must be apportioned among the states. PRCs are taxed  
          on a proportional basis consistent with actual presence in  
          California. Current law requires presence to be measured by the  
          number of "car-days" each car class spent in the State during  
          the preceding calendar year.

          Each month, five railroad car companies report border crossing  
          data (movements in and out of California) to BOE, whose software  
          (1) processes this data, and (2) determines the number of days  
          each car was physically present in California during the  
          calendar year immediately preceding each lien date. However, as  
          referenced above, the software that BOE uses to measure  
          "car-days" is nearing the end of its useful life. 
          
          Proposed Law: This bill would, among other things, change 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 2017-18. Thereafter, the bill would set  
          mileage as the exclusive apportionment factor.  









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          Related  
          Legislation:  
                 SB 357 (Hall, 2015) was similar to this bill.  
               Specifically, it also proposed changing to a mileage based  
               system. Additionally, the bill included valuation changes  
               to (1) eliminate additional depreciation given to cars  
               purchased used and (2) eliminate additional depreciation  
               given to new additions and betterments to existing cars.  
               Depreciation would have continued to be calculated for all  
               cars based on a 22- or 25-year life. The bill was held on  
               this Committee's Suspense File.


                 AB 2262 (Frazier, 2014) was identical to SB 357; and was  
               also held on this Committee's Suspense File.


          Staff Comments: This bill could result in administrative  
          efficiency gains for both PRC owners and BOE. Utilizing a  
          mileage-based system to calculate the Private Railroad Car Tax  
          would conform to the methodology used by all other states that  
          impose such a tax, making compliance easier for PRC owners.  
          Additionally, BOE notes that a mileage-based system is less  
          complex and costly for it to administer. 

          The Private Railroad Car Tax is the only property tax that flows  
          to the state's General Fund, where it generated $9.9 million in  
          2015, up from $5.9 million in 2009. Annual tax revenues vary,  
          and reflect a variety of factors, including the level of (1) new  
          PRC investment, and (2) the level of California economic  
          activity. Complicating the calculation further is the fact that  
          the revenue estimate depends on two other variables: the  
          aforementioned private rail car tax rate, and an adjustment to  
          comply with the requirements of current federal law (the  
          Railroad Revitalization and Regulatory Reform Act), both of  
          which are developed by BOE's Research and Statistics Section and  
          approved by the Board Members. Comparing mileage and car-day  
          data for the last several years, BOE concludes that  
          transitioning to a mileage-based system would result in a  
          revenue loss of $1.5 million in 2017-18, and $2.1 million  
          annually thereafter.

          The methodological changes proposed by the bill would not impact  
          the assessments of individual companies in a uniform way.  
          Instead, most companies would benefit from the proposed changes,  







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          but others could see assessments increase.



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