BILL ANALYSIS �
AB 2262
Page 1
ASSEMBLY THIRD READING
AB 2262 (Fraizer)
As Amended April 1, 2014
2/3 vote
REVENUE & TAXATION 8-0 APPROPRIATIONS 16-0
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|Ayes:|Bocanegra, Harkey, Beth |Ayes:|Gatto, Bigelow, |
| |Gaines, Gordon, Mullin, | |Bocanegra, Bradford, Ian |
| |Nestande, Pan, | |Calderon, Campos, Eggman, |
| |V. Manuel P�rez | |Gomez, Holden, Jones, |
| | | |Linder, Pan, Quirk, |
| | | |Ridley-Thomas, Wagner, |
| | | |Weber |
|-----+--------------------------+-----+--------------------------|
| | | | |
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SUMMARY : Changes the method of calculating the property tax on
private railroad cars (PRRCs) by switching from calendar days to
miles traveled, and modifies the depreciation schedule as
specified. Specifically, this bill :
1)Provides that the Board of Equalization (BOE) shall determine
the physical presence, for interstate apportionment purposes,
of PRRCs upon the basis of mileage instead of calendar days.
2)Provides that the BOE shall value the cars based on the
owner's acquisition cost, including additions and betterments,
less depreciation.
3)Eliminates the additional depreciation provided to owners who
purchase used PRRCs by deleting the phrase "minus the age of
acquisition."
4)Deletes the definition of "class of private cars."
5)Deletes the provision exempting PRRCs from assessment for the
period of time the rail car is not qualified for revenue
service and is in a repair facility in California.
FISCAL EFFECT : According to the Assembly Appropriations
Committee:
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1)Potentially significant impact to the BOE's administrative
costs, more than offset by cancelling its $13,000 annual
current railroad car registration subscription and avoiding
the cost to replace current car-day counting software, which
the BOE estimates could cost approximately $500,000.
2)Decrease in revenue of between $1.6 million and $1.2 million
from switching to miles travelled basis for computing tax.
COMMENTS : The author states that "AB 2262 converts the way
physical presence is measured from the days spent in California
to the miles traveled. A mileage based system is less complex
to administer and conforms to the way other states that impose a
PPRC tax measure presence." Additionally, the author states
that the resulting system will be "less costly for the BOE to
administer and will reduce compliance costs for PRRC owners
railroads. Streamlining the administration of this tax allows
BOE to assign more senior staff to other duties."
Proponents argue, "AB 2262 will establish a simplified procedure
for assessing privately owned railroad cars that conforms to the
method used by all other states that measure presence. Changing
to a mileage-based system like those used in other states will
reduce costs and increase compliance for both private railroad
car owners and railroad companies." Additionally, supporters of
this bill argue that "measuring presence with a mileage-based
system is less complex and less costly to administer, which
would allow the BOE to assign staff to other duties. Accuracy
would also be improved because BOE staff will be able to request
mileage data directly, from railroad car owners and will not be
forced to rely on less accurate car day counts currently
received by railroad companies." Finally, supporters explain
that "switching to a mileage-based system avoids the approaching
necessity of replacing current software at an estimated cost of
$500,000. The existing program uses obsolete code language that
is no longer supported and thus increasingly difficult to
maintain."
Assembly Revenue and Taxation Committee staff comments:
1)Background. In 1995, the Legislature enacted AB 1426
(Pringle), Chapter 22, Statutes of 1995, which imposed the car
class depreciation schedule set forth in Revenue and Taxation
Code (R&TC) Section 11292. AB 1426 was sponsored by BOE
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Member Dean Andal, with the cooperation of car companies and
BOE staff, to develop a valuation method which reduced
disputes, but in a revenue neutral manner. Although the miles
traveled were considered in AB 1426, the valuation method was
rejected because of the revenue loss.
2)Administrative Savings. According to the author's office, the
car-day count software program is nearing the end of its
useful life, and switching to a mileage-based system would
avoid the cost of replacing the software program. The BOE
estimates a one-time cost of $500,000 for replacing the
day-counter software program. Additionally, the BOE estimates
that switching over to a mileage based system would eliminate
a $13,000 yearly subscription to keep track of the number of
days PRRCs are in California. Finally, by utilizing miles
traveled instead of calendar days, California will be in
conformity with the rest of North America. This may make it
easier for taxpayers to comply with property tax laws.
3)Days vs. Mileage. The purpose of the property tax system is
to fairly assess the value of property divided among different
local jurisdictions. The proponents of this bill have argued
that switching from "car days" to "mileage" traveled is a much
better measure of the property's value because the economic
benefit of a rail car is derived from its movement of cargo
from one location to another. Under the current system, a
PRRC can be taxed while standing idle awaiting cargo. This
argument assumes that economic benefit is only gained while
the rail car is in motion. This assumption fails to
acknowledge the economic benefit that is received from the
loading and unloading of cargo.
By switching over to a miles traveled method of valuation, this
bill places all of the economic value on the distance
traveled. This may be an appropriate method of valuation if
most of the rail cars traveled through California in order to
reach their destination. However, California is considered a
"terminal state," meaning that rail cars are frequently left
idle waiting to load and unload cargo at a port or at a
manufacturing facility. This means that most of the economic
benefit is actually gained, at least in California, not from
traveling on rails but from the loading of cargo. Switching to
a miles traveled method of valuation incorrectly assumes that
all economic value derives only from the movement or PRRCs. A
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more accurate method of valuation would be to estimate how
much value is added at each stage of supply chain. This could
involve a hybrid system like the method used for valuing
commercial aircraft.
In recognizing the importance of loading and unloading cargo,
commercial aircrafts have adopted a hybrid system of
valuation. In general, the valuation system is split between
flight and ground time, and arrival and departures. The
flight and ground time factor is weighted 75%, and the
arrivals and departures factor is weighted 25%. This hybrid
method of valuation recognizes the importance of the various
stages of travel, and attempts to provide a more accurate
method of valuing property. A hybrid system of valuation,
however, may increase administrative difficulties and decrease
accuracy. Understanding that a large portion of the economic
value attributed to PRRCs derive from the loading and
unloading of cargo, especially in a terminal state like
California, the Legislature may wish to consider maintaining
the existing calendar day assessment method instead of
switching to miles traveled.
4)Easing Administrative Burdens. This bill attempts to reduce
administrative burden by disregarding car classes when
determining the presence of a PRRC. The car-day program
receives border crossing data and determines the number of
days each car was physically present in California. The
program then converts the data to an equivalent number of
cars, broken down by specific car class, based on the American
Association of Railroads Alpha designation. R&TC Section
11292 currently has six different categories for car classes.
Limiting PRRC valuation to two classes, either a 22- or
25-year depreciation life, would significantly reduce
administrative difficulties. Although it may be more accurate
to value PRRCs based on car classes, the change may be
justified in terms of administrative ease, and ease of
compliance for the PRRC owners.
In addition to ignoring the car class in determining valuation
of PRRCs, this bill modifies the depreciation schedule for
used PRRCs and for improvements or betterments made to PRRCs.
Under current law, a purchaser of a used PRRC receives the
depreciation benefits of the car as of the day the car was
built. As an example, if a 10-year-old car with the
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depreciation life of 22 years is sold, the purchaser of the
PRRC can continue with the depreciation schedule from the
previous owner. Current law also provides for additional
depreciation benefits for improving PRRCs, specifically
allowing an improvement to be depreciated as if it were part
of the car when first built. As an example, if an owner adds
a refrigeration system worth $20,000 to his 11-year-old PRRC,
and the PRRC has a depreciation life of 22 years, the owner
can immediately depreciate $10,000.
The elimination of car classes for valuation purposes and
modifications to the depreciation schedule can, by itself,
reduce the amount of reporting from 500 lines of data to a
maximum of 38 lines of data. This would reduce data entry and
processing time for staff. Moreover, these changes can be
done independently of the change from calendar days to miles
traveled. This would reduce some of the administrative
burdens that proponents are favoring while maintaining General
Fund revenue.
Analysis Prepared by : Carlos Anguiano / REV. & TAX. / (916)
319-2098
FN: 0003665