The California Constitution authorizes the Legislature to classify personal property for differential taxation or for exemption by means of a statute approved by a ²/₃ vote of the membership of each house. Under the Private Railroad Car Tax Law, the State Board of Equalization assesses and taxes private railroad cars operated upon railroads in this state. In making an assessment, the board is required to determine the average number of each class of private railroad cars physically present in the state in the calendar year immediately preceding the fiscal year in which the tax is imposed upon the basis of car days.

This bill would instead require the board, in making the assessment, to determine the physical presence of private railroad cars in the state in the calendar year immediately preceding the fiscal year in which the tax is imposed upon the basis of mileage.

Existing law also requires the board, in making the above assessment, to value the cars by class based on the owners acquisition cost, less depreciation, and sets forth the manner in which depreciation is calculated for each class of cars, as specified.

This bill would instead require the board, in making the assessment, to value the cars based on the owners acquisition cost, including additions and betterments, less depreciation, and would revise the manner in which the depreciation is calculated, as specified.

Existing law requires the board to exclude from the California factor car mileage, car days, or other data that occurs while cars are not qualified for revenue service and are in a repair facility in the state, as specified. Existing law defines the term class of private railroad cars for these purposes.

This bill would delete the definition of the term class of private railroad cars and would eliminate the requirement that the board exclude from the California factor car mileage, car days, or other data that occurs while cars are not qualified for revenue service and are in a repair facility in the state.

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2015 - 2016 Regular Session

SB 357 (Hall) - Private railroad car tax

This bill meets the criteria for referral to the Suspense File.

Bill Summary: SB 357 would (1) change the tax calculation methodology on private railroad cars (PRCs) as specified, and (2) modify the depreciation schedules used to assess the valuation of individual PRCs.

Fiscal Impact:

• The Board of Equalization (BOE) indicates that this measure would result in an annual General Fund revenue loss of $507,000 million.

• 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 this one-time cost of about $500,000. Additionally, the bill would eliminate BOE’s need to continue the current $13,000 annual railroad car registration subscription to verify the days that rail cars are present in the State.

Background: The Private Railroad Car 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 dictates 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), determined by BOE’s Research and Statistics Section.

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:

• The bill would modify the ratio used to calculate the base of the Private Railroad Car Tax. Specifically, instead of multiplying the adjusted value of the car by the ratio of the amount of days in service in California over the total days in service, the bill changes the ratio to the mileage in the state over total mileage.

• The bill would prohibit the car’s age at acquisition from being used to calculate depreciation,

• The bill would provide that improvements to the car cannot be depreciated.

Related Legislation:

AB 2262 (Frazier, 2014) was identical to this bill; it was held on this Committee’s suspense file.

Staff Comments: This bill could result in administrative efficiency gains for both PRC owners and BOE. 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 owners. Additionally, BOE notes that a mileage-based system is less complex and costly for it to administer.

The estimate of annual revenue loss from this bill appears to be volatile. For instance, BOE’s current estimate of the annual loss from SB 367 is considerably lower than the $1.2 million estimate that accompanied AB 2262. BOE’s revenue estimation methodology uses collected mileage data from companies that comprise roughly three-fifths of total taxes imposed and then extrapolates to the remainder of the population. A reporting error was a contributing factor to 2014’s estimate of higher revenue loss. 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). This bill’s estimated revenue loss of roughly $500,000 represents an average over a long-run period. However, the revenue loss is 2015-16 could be higher if recent delays at the State’s ports cause PRCs to be physically in the State longer than would have happened on the natural.

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, but others could see assessments increase.

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Robert M. Hertzberg, Chair

2015 - 2016 Regular

PRIVATE RAILROAD CAR TAX

Changes the apportionment method for calculating the private railroad car tax.

Background and Existing Law

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 supplies approximately $8 million annually.

Private railroad cars transport freight, and aren’t owned by railroads, which are centrally assessed by BOE, and pay the property tax. 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 10 companies control 80%.

The base of the tax is the acquisition cost of the cars 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, plus depreciation for improvements the owner makes to the cars. 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 a state. In this case, state law directs the value of the fleet to be apportioned by multiplying it by 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 a service approximately $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 357 changes the base of the Private Railroad Car Tax in three ways:

• First, the bill changes the apportionment method for the tax. Instead of multiplying the adjusted value of the car by the ratio of the average amount of days in service in California over the total days in service, the bill changes the ratio to the average mileage in the state over total mileage.

• Second, SB 357 prohibits the car’s age at acquisition from being used to calculate depreciation.

• Lastly, the measure provides that improvements to the car can’t be depreciated.

The measure also makes conforming changes to the law.

State Revenue Impact

According to BOE, SB 357 results in revenue losses to the state of approximately $507,000 annually.

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 357 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 357 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 spending in service in the state. Additionally, the bill would delete BOE’s need to replace old information technology, thereby creating savings for the state. However, while changing from one method to another may shift the burden between taxpayers within the private rail car industry; the bill enacts an aggregate $500,000 tax cut for the industry as a whole. Instead, the measure could include an assessment factor 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 system wouldn’t account for this increase in the demand for public services. Additionally, a mileage based system assumes that a car’s value is entirely based on its capacity to move cargo, as mileage as a percentage of the whole is the sole variable that matters. The current system allows a terminal state such as California to capture the value of the rail car’s time spent unloading and loading cargo.

4. Do it again. SB 357 is identical to AB 2262 (Frazier, 2013), which the Committee approved unanimously last year. The Senate Appropriations Committee held the measure on its suspense file.

Support and Opposition

(4/9/15)

Support: State Board of Equalization; BOE Member George Runner; California Taxpayers’ Association; Railway Supply Institute; TTX Company.

Opposition: Unknown.

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