BILL ANALYSIS Ó SENATE COMMITTEE ON APPROPRIATIONS Senator Ricardo Lara, Chair 2015 - 2016 Regular Session SB 1394 (Hall) - Private railroad car tax: valuation ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: March 28, 2016 |Policy Vote: GOV. & F. 6 - 0 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: No | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: April 25, 2016 |Consultant: Robert Ingenito | | | | ----------------------------------------------------------------- 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 SB 1394 (Hall) Page 1 of ? 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. SB 1394 (Hall) Page 2 of ? 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, SB 1394 (Hall) Page 3 of ? but others could see assessments increase. -- END --