Survey of Railroad and Utility Taxation Practices Among the States: 2005 Update
This report presents the results of a survey of the states, conducted in 2003 and 2004, regarding the methods used in taxation of the property of railroads and public utilities. The survey was undertaken to provide a background of technical information against which New York's methods of taxing this kind of property can be compared.
This report comes at a time when the burden of property taxation in New York continues to shift discernibly from railroad and utility properties to non-utility properties, a trend that first appeared in the 1980s. Total property taxes levied in New York State have risen steadily over the decade of the 1990s through the present, to nearly $31.5 billion statewide in fiscal year 2003. However, in that same period, the property taxes paid by utility companies generally did not keep pace with taxes paid by other property owners. This shift is the result of several factors, including: strong appreciation in residential real estate markets, a pace which dramatically exceeded increases in the primarily cost-based railroad and utility values; increasingly successful court challenges to utility and railroad assessments; reduction in the value of electrical generation facilities following deregulation of the industry; and implementation of an expanded railroad tax incentive program.
Ad valorem taxation is more complex for railroad and utility property than for other types of properties, for a variety of reasons. Some utilities operate on, above, or under public rights of way, essentially not owning the land on which their taxable property is located. Utility and railroad lines also extend over many assessing and taxing jurisdictions, where assessments are often at varying proportions of full value. The properties are also complex as they include power plants, railroad yards, etc. Furthermore, utility and railroad systems are often interstate operations, and, depending on the nature of state statutes, apportionment of the value of the entire system to the state, and, in turn, to local governments, may be necessary.
Although all valuation methods are relevant for utilities and railroads, this type of property has been sometimes less amenable to valuation through the sales comparison and income approaches than are residential, commercial, and other such properties. This has been especially true in New York, where the valuation function is split between the State and local governments, thus precluding valuation of a given company's property as a unit. Because some companies are not publicly traded, application of the market-based approach, based on stock and debt values, is sometimes infeasible. Certain companies operate on thin profit margins, or even with negative net incomes, making it difficult to impute the rental values necessary for using the income approach. Such economic conditions have typified railroad companies in the northeastern states until recently: most had been unprofitable since the late 1940s, mainly because transportation revenues were increasingly captured by competing trucking companies. And, since government generally regulates utility companies, their reported incomes follow definitions appropriate for ratemaking purposes; adjustments must be made to use the data to value the company's property.
Because of shortcomings in the data available for these two methods of valuation, tax authorities have been forced to rely more heavily than usual on the cost approach. In New York, the complexity of the assessment administration structure further encourages reliance on cost to value discrete pieces of property separately. Developing cost methodology requires considerable expertise and familiarity with accounting, engineering, and with complex types of property. Due to this requirement and the multi-jurisdictional nature of railroad and utility systems, virtually all state governments, including New York's, have assumed at least a partial role in the valuation of utility property for local taxation purposes. To our knowledge, only New York has split the function between the State and local governments in such a fashion that both levels of government value either the same property or the same types of property.
In the past decade New York, along with other states, has undertaken a restructuring of the electrical generation utility industry, and rate-regulated utilities have divested, or sold, their generating stations to non-affiliated companies. A market has developed for these facilities (often known as merchant power plants), and the firms owning them are not normally subject to rate regulation. These firms have purchased the facilities for their income-producing potential, and generation is sometimes only one of several types of business conducted by the firm. By contrast electricity transmission and distribution equipment remains part of the rate-regulated utility company. Such equipment is generally regarded by the utilities as assets that lose value over time, and are accordingly depreciated. Assessing jurisdictions tend to value such equipment according to the cost approach, and depreciate it either according to schedules provided by the companies themselves, or according to methodology developed by the assessing units themselves (especially likely when the state does the assessing). In New York State, transmission and distribution equipment sited in the public way are deemed "specialty" properties and are valued according to reproduction cost new less depreciation.
As a result of changes in the electric utility industry stemming from deregulation and restructuring, New York State is currently applying all three approaches to valuation of electrical generation property for purposes of ratio studies and for advisory appraisals to local assessing units. Similar changes in valuation methodology for generation facilities have also developed to some extent in areas of the country undergoing industry restructuring, mainly in Northeastern and Midwestern states, and especially where the responsibility for valuing utility property is at the local (town, township, city, county) level.
The survey used to compile the information in this update sought to identify a number of key characteristics of the systems used by different states to tax railroad and utility property. Each state's methodology is examined according to the following thirteen characteristics: (1) basis of taxation, (2) property subject to taxation (or exempt); (3) classification of tax rates or assessments (if any), (4) level of government which determines basis for tax liability, (5) report filing requirements and method(s) required by law for value determination, (6) practical application of valuation method(s), (7) valuation treatment of large facilities such as power plants, dams or rail yards, (8) apportionment method(s) required by law, (9) practical application of apportionment requirements, (10) apportionment treatment of large facilities such as power plants, dams or rail yards, (11) description of assessment appeals system, (12) status of regulation/restructuring of electrical generation, and impact on valuation and apportionment methods used, and (13) staffing at the state level.
Information for this update was obtained in 2003 and 2004 through telephone interviews with state officials, who provided revisions to the information contained in the respective state profiles in 1993, and who also provided information on four characteristics that were not included in the original 1993 survey. The specific statutes and the names of the officials interviewed are listed at the end of each state's entry. The following section presents the overall findings of the survey and Table 1, which follows, shows each state's practices in a short summary format.
Basis for taxation:
Ad valorem taxation is the primary approach used to tax railroad and utility property. Most states require assessments to be at specified percentages of full value, including full value itself. In New York, railroad and utility property (and all other real property) must be taxed based on the uniform percentage of full value within each assessing jurisdiction (percentage varies by jurisdiction), and for two jurisdictions, by property class.
Some states, such as Idaho, Michigan, Minnesota, and Texas use the gross receipts approach in lieu of property taxation on some utilities. Other states, including New York, impose gross receipts taxation for state revenue purposes, in addition to local property taxes. Many states (including New York) also levy a separate fee on utilities and/or railroads, which is intended to compensate state government for costs incurred in regulatory and/or valuation activities.
Property subject to taxation:
In virtually all of the states, the real property of railroads and utilities is subject to taxation. Most states also tax personalty, including railway rolling stock. However, they generally exempt the value of intangibles, and virtually all exempt at least some intangibles, such as cash or bank accounts. Utility property occupying public rights of way is usually taxable, although statutes of only two states, Georgia and New York, treat these properties separately as "special franchises." Specific exemptions found in most states include waste water treatment and pollution control systems, municipally owned utilities, electric cooperatives (often taxed on gross receipts), water companies (especially in western states), and federally owned property such as AMTRAK rail lines and rolling stock.
In a few states ad valorem taxation has been eliminated on selected facilities, and other types of taxes are levied instead. Iowa has replaced its ad valorem taxation of electric and gas utilities with an excise tax on energy production, transmission and delivery property. New Jersey imposes a corporation business tax on utility plant and equipment. Wisconsin imposes state license fees on utility operating property. Power plants are subject to payments in lieu of taxes (PILOTs) in Nebraska.
Utility and railroad realty in New York is taxable, but all personalty is exempt, including railway rolling stock (an exception is the intangible value of special franchises, which is taxable). New York exemptions also extend to pollution abatement facilities belonging to these entities. Furthermore, both intrastate and interstate railroad system property is exempt to the extent that locally assessed values exceed special "ceiling values" established by the state.
Nearly half the states have classified systems that tax railroads and utilities differentially as compared to other property; the remaining states do not tax railroad and utility property differently from other property. Those that do have classified systems are constrained by provisions of the Federal Railroad Revitalization and Regulatory Act (the 4-R" Act), which prohibits discriminatory taxation of interstate railroads. Classified assessment levels are significantly more common than classified rates, with 21 states using this approach. Five states other than New York use both classified assessments and tax rates. West Virginia has a unique classification system whereby utilities are taxed at a higher rate within incorporated municipalities than outside.
New York has two classified systems of taxation, a four-class system applicable in New York City and Nassau County and a two-rate "homestead -- non-homestead" system which can be adopted by other municipalities. However, in the overwhelming majority of New York municipalities, railroads and utilities must be valued and taxed at the same rates as all other types of real property.
Level of government that determines the basis for tax liability -- ad valorem tax:
In general, most states place responsibility for valuing utility and railroad system property at the state level. Such system (or operating) property generally includes:
Property located along operating networks that comprise lines or pathways of transmission or flow (e.g., wires, pipelines, rail lines).
Property located at specific sites along these networks that consist of structures necessary for system operation (e.g., electrical substations, rail yards, or telephone switching stations).
Property owned by railroads and utilities, but which is not part of their respective operating systems, is generally valued by local assessors. Examples of such property include buildings or land leased to other firms.
Newer utilities, such as cable television, are generally assessed locally. In the past decade, many states have begun to develop statutes that specifically address the valuation of cable television and the most recently developed telecommunication systems. At the same time, there is copious language in the statutes of some states pertaining to older technologies, such as "telegraph companies" or "sleeping car companies." In other words, state statutes tend to be further behind current utility technologies than is the case with other types of property.
New York has an anomalous method for determining which utility and railroad property is to be valued by the state, and which is to be valued locally. The State Board of Real Property Services (SBRPS) is charged with valuing utility property operating in the public way under special franchises. Taxable real property of utilities holding special franchises includes: (1) the value of the tangible property fixed above, on, or below a publicly owned right of way; and (2) the value of the intangible right to operate on these rights of way. However, local assessors are generally responsible for valuation of utility property operating on, over, or under privately owned lands. Despite the difference in the level of government responsibility for its assessment, the property valued by local assessors is essentially the same as the special franchise property valued by the state. The assessors can seek advisory appraisals of the properties they assess from SBRPS, but they are not bound by the resulting valuations, nor is SBRPS required to defend these values in the context of judicial review (although in practice SBRPS does in fact testify in such cases).
In contrast to most other states, New York's system of valuing railroad property is essentially duplicative. While the local assessors have the statutory authority to value railroad properties in their respective jurisdictions, this authority is effectively overshadowed by that of SBRPS, which is charged with setting valuation limits or "ceilings," above which the railroad system property is exempt from taxation.
Report filing and valuation methods required by statute for ad valorem taxation:
Most states require utilities to submit specified financial and real property inventory information to state agencies, and sometimes to local governments (usually counties). A few states do not require submission of such information, but utilities typically provide it voluntarily in order to guard against exaggerated inventories and/or overly high valuations. Filing of required reports has become more simplified in such states as Michigan, where utility companies may file reports on-line.
In general, statutes authorize appropriate state agencies to value railroads utilities as entire systems, or units, which often extend across state lines. The statutes generally direct the state assessing agency to allocate a portion of the company's value to the state, and, in turn, to apportion this value among municipal jurisdictions. Beyond this, statutory language regarding appropriate valuation methods is usually somewhat terse or even absent. The statutes of a few states, such as Arkansas and North Carolina, provide detailed guidelines for valuing railroad and/or utility property, but such detail is the exception rather than the rule at the statutory level. Detailed guidelines, where they exist, come instead from internal state agency rules and regulations and from case law. Specific valuation formulas are statutorily required in only one state (Arizona).
New York requires that railroads and utilities file financial and inventory information by municipality with SBRPS, and SBRPS uses information utilities must file with the Public Service Commission, the Department of Transportation, and with various federal regulatory agencies. Both types of companies pay fees to SBRPS for state assessment.
New York has no statutes governing valuation methods for utilities, but statutory language governing valuing railroads (for establishing ceiling values) is quite extensive. These statutes specify the use of reproduction cost new, less depreciation from physical, functional, and economic obsolescence. Railroad company earnings are used in conjunction with reproduction costs and statutory exemption percentages to establish ceiling values for each railroad company. All ceiling values are then adjusted to local assessment levels by use of equalization rates established by SBRPS.
In most states, the approach used usually depends upon the type of property being valued. If the company is publicly traded, profitable, and valued as a unit, all three approaches may be applied and the value determined as some weighted average of the three results. As discussed below in #7, restructuring of the electric utility industry has spurred the divestiture and sale of generation facilities from rate-regulated utility companies. Sales of these facilities have been plentiful to justify use of the market approach to value. However, since many companies are not traded, the market approach (stock and debt) often cannot be used. The income approach is utilized considerably more often than the market approach, and is a primary method of valuation in over half of the states, especially for non-regulated utility companies and those which have a favorable history of net earnings. The income approach is a primary approach to valuing railroads in much of the nation, but it has been less useful in the northeastern part of the country where many railroads have been unprofitable in the post-war era.
The cost approach is generally less preferred than the income approach as a primary method, but is nevertheless widely used because of data availability. Data for utilizing the cost approach can be readily found in the records of the companies themselves. When the cost method is used, forty states value property by original cost (often termed historical cost or book cost), with depreciation applied over the expected life of the property. The remaining states apply the cost approach according to replacement or reproduction cost new less depreciation (RCNLD). States using RCNLD obtain information on cost and depreciation (physical, functional and external) either from published cost manuals or from procedures produced internally by state agencies themselves. Assessments are likely to be higher when RCNLD is used, as this particular methodology is more effectively measures the physical, functional and external condition of the subject property, and is not linked to systematic amortization of the subject as indicated in the books of the owner. However, applying RCNLD requires more resources (time and personnel) than with original cost. Both cost methodologies are applied in some states such as Indiana, where utility system realty is valued according to RCNLD, whereas utility system equipment is valued according to original cost less depreciation.
Local assessors generally value non-system property. Much of this property is leased, and it thus lends itself to the income approach. Alternatively, the cost approach may be used to value structures and the sales comparison (i.e., market) approach to value the land.
Methodology applied to the locally assessed utility and railroad property in New York (i.e., other than special franchises and ceiling railroads) probably varies by assessing jurisdiction; no detailed information is available but there is probably considerable variation from place to place. As indicated above, utility special franchises are considered "specialty" properties and are valued by SBRPS through reproduction or replacement cost new less depreciation for physical, functional, and economic obsolescence, and all three approaches are considered for electricity generation plants (see below). Determination of New York's railroad "ceilings" is also based on the cost approach, with adjustments for company earnings: companies with low earnings receive lower ceiling values than those with high earnings.
Valuation treatment of large facilities such as power plants, dams, or rail yards:
Nearly two-thirds of all states vest the responsibility for valuing power plants at the state level, and generally apply the same approaches to value for these facilities as with other utility property. This is particularly so in states that continue to value generation facilities as part of a utility system. In Indiana, Kentucky and North Carolina power plants are still considered utilities regardless of their ownership, and the cost approach (primarily original cost) is used to value machinery and equipment. In Michigan merchant power plant remain assessed at the state level after restructuring. However, in Alabama and Mississippi merchant power plants are assessed locally, while power plants owned by regulated utilities remain assessed at the state level.
Procedures for valuing power plants are less certain in states where these facilities are locally assessed. Whatever assessment procedures that have been used to value these facilities prior to deregulation, local assessing units have recently faced assessment grievances from new owners of these price-deregulated facilities, claiming that the assessment on their respective facilities at the time of acquisition have been excessive. This situation has developed not only in New York but also in the New England states, Pennsylvania and Illinois. Affected assessing units are now using market and income approaches to value as well as the traditional cost approach for valuing these facilities, yielding assessed values that are less likely to invite assessment grievances by power plant owners. In Massachusetts, local assessing units are now required to use at least two approaches in valuing power plant property.
Privately owned dams and rail yards located in states having unitary valuation practices, are valued according to the same rules as used for other operating property. Where local assessment is the norm, valuation practices are not verified, and are not as well documented as those used at the state level.
In New York, there is no statutory language that specifies valuation procedures for power plant facilities and any associated dams, and local assessing units have responsibility for valuing these facilities. However, assessing units do request advisory appraisals on power plants from SBRPS staff in years of reassessment. Such appraisals now apply all three approaches to value these facilities. Rail yard property is locally assessed in New York, but valuation limits are subject to state-set "ceiling" values, as with other railroad property.
Apportionment method(s) required by statute:
Thirty-seven states currently use the unitary method of central assessment for both railroad and utility property, and two other states use the unitary approach with railroad property alone. These states have statutes that authorize state agencies to apportion system property to the state and, in turn, to local taxing jurisdictions. Statutes in most of these states outline measures to be considered for apportioning property value, according to quantity of property and its intensity of use (e.g., ton-miles of track, miles of main track and branch track, miles of pipeline of a given diameter, number of airplane landings, etc.). In a few of these states (Idaho, Missouri, West Virginia) only the broadest guidelines are indicated, such as "according to reasonable business-related factors". Non-system properties, such as facilities leased to other companies, are excluded from the apportionment process.
New York and some other states such as Massachusetts and Virginia do not use the unitary method of valuation, and apportionment to municipalities is based on the actual location of the property as determined from company and state records. In New York, the assessment of each special franchise is provided by SBRPS to the appropriate assessing unit. Where there is more than one school district or special district, the assessment is apportioned by the local assessor among the districts. No particular method of apportioning special franchise assessments among multiple taxing jurisdictions is required by law or rule.
Railroad ceiling values in New York are also distributed to municipalities according to the location of the railroad real property. There are no specific statutory requirements governing apportionment of the taxable value to school or special districts by assessors.
Practical application of apportionment requirement(s):
Most states, employing the unitary approach, implement statutory guidelines by utilizing measures of property quantity, value and/or use-intensity to allocate distributable portions of utility or railroad systems, as specified in state departmental administrative laws, rules, codes or regulations. Property factors include such indicators as miles of track, wire, pipeline, etc., of a given type, or the gross or net investment of these items. Typical use factors are operating revenues, car mileage, ton mileage, airline landings, etc. For many types of utilities (and for railroads), the factors are quite similar, but for others, such as airlines, a specialized set of factors is devised. Consideration is frequently given to market levels in different areas of the state in order to adjust allocations of land value to taxing units.
In New York, special franchise property is apportioned according to mileage of pipe, wire, etc., and the associated equipment actually located in each assessing jurisdiction. Assessments of special franchises in a town containing more than one school or special district are apportioned by the local assessor, presumably according to location. The same basic approach governs allocation of taxable value for railroad ceilings to taxing units: the state apportions the ceiling value to the assessing unit based on location and the local assessor determines how much of the property in the assessing unit is in each of its component taxing units.
Apportionment treatment of large facilities such as power plants, dams or rail yards):
Value of site-specific system property, such as power stations and rail yards, is generally wholly apportioned to the specific situs in question. A few states such as Alabama (non-merchant plants), North Dakota and South Carolina (rail yards) distribute large facility value along the respective operating systems.
Power plants and privately owned dams in New York are locally valued, and are assessed by situs of the properties in question. Railroad ceiling values are applied to the values of rail yard properties in each of the municipalities where these facilities are located, essentially allocating a portion of the large facility to any taxing jurisdiction in which the owner operates.
Description of assessment appeals system:
All states have procedures for grieving assessments of utility and railroad property at hearings with the state or local government that establishes the assessments (as with all other types of property). Assessments on state-assessed property can be generally contested by local governments as well as by the owners at informal hearings. Above this basic level of grievance, approximately two-thirds of the states allow utility and railroad property owners (as well as local assessing units in states having centralized assessing) to appeal assessments to state boards or tribunals independent of the state agency charged with setting the assessments, or to an administrative law court. The advantage of appealing through these specialized bodies is that the cases are likely to be heard more expeditiously than would be the case with to state and circuit courts, whose dockets encompass a wide variety of issues beyond property valuation and assessment. Officials in these special proceedings hear cases pertaining only to valuation and taxation matters, and have amassed technical expertise in these areas of law and practice. In most instances, parties can make further appeals to state circuit or supreme courts, although courts in these states may choose not to hear further appeals, as in the case of Ohio. Property owners in such states as Illinois and Vermont have the option of appealing cases either to state court or to a state tax appeals board, and normally the latter option is chosen. In a few states such as Wyoming local assessing units may appeal state-determined values to an independent board, but no further appeal can be made to district court.
By contrast, New York and the remaining states utilize a more prolonged judicial review process in circuit or superior courts. In New York, both property owners and local assessing units may appeal state-set tentative railroad ceiling and special franchise values to SBRPS at a formal hearing before the assessed values become final. Owners may grieve on locally assessed values with local Boards of Assessment Review, including railroad assessments, as limited by state-set railroad ceilings. Further appeal of both board-determined and local assessments may be made to State Supreme Court, and if necessary to the Appellate Division and then to the highest court, the State Court of Appeals.
Status of deregulation/restructuring of electric generating and impact on valuation and apportionment methods used:
Nearly half of all states have yet to undergo formal divestiture of generating facilities from rate-regulated utilities, which for the most part retain ownership of transmission and distribution property. The majority of these states, located mainly in the Southeast, Great Plains, and in the West, practice unitary valuation procedures. Deregulation and restructuring is presently active in about 20 states, which are located mainly in the in the Northeast and Midwest. In the remainder of states, this process has been suspended or is under study. States that apply unitary valuation procedures have typically undergone limited electric utility deregulation and restructuring activity, as contrasted with states not using those procedures. Unitary states generally continue to value power plant facilities on the basis of income and original cost. For example, in Indiana, North Carolina and Kentucky, merchant plants are still considered utility property, and in Kentucky are valued as part of the operating system of the firm that owns the facility in question.
However, in some unitary states these facilities have received preferences that lower the burden of taxation as compared to other utility property. For example, plant personalty (equipment) in Ohio is now valued at a lower statutory assessment ratio than plant realty (land and structures containing the equipment). Alabama regards merchant power plants as non-utilities as per a court decision, and as such they are now locally assessed, and at a lower assessment ratio than used for non-merchant facilities (still assessed at the state level). Kansas and Maryland have instituted partial exemptions for plant facilities.
California's difficult experience with deregulation and restructuring has affected valuation procedures. Prior to deregulation, the state valued generation facilities through the unitary method, applying all three approaches to value. When restructuring commenced in 2000, the responsibility for assessing merchant plants devolved to county assessing units, and they were valued primarily according to sales comparison. The resultant assessments on these facilities were subject to annual increase limits of two percent, stipulated by Proposition 13. However, the state suspended the deregulation process in 2002 following allegations of energy price manipulation by some merchant plant owners. At the present time, the state board of equalization has reclaimed jurisdiction of assessing all power plants, and apportions value by situs. Plants are now valued according to replacement cost, income, and sales, and the resultant assessments are no longer subject to the assessment increase limits of Proposition 13.
States in which generating facilities are locally assessed are generally states in which deregulation and restructuring have been active, and in which valuation procedures have been altered. Power plant facilities in Pennsylvania were once subject to a uniform statewide ad valorem utility tax, the calculation of which incorporated local (county) assessed values that were exempt from local taxation. When these facilities became excluded from this tax in 2000, and instead became subject to local taxation based on locally assessed values, new merchant plant owners began to grieve these assessments, arguing that they were excessive. Although current valuation procedures at the local level are not known, it is likely that these assessing units are now adopting more diversified approaches to value. In Illinois, county assessing units are now individually negotiating assessments with plant owners, especially on the value of tangible personalty. Local assessing units in New England are utilizing market and income approaches as well as the cost approach for valuing these facilities. Connecticut and Massachusetts have partially reimbursed municipalities for losses in value on plant assessments based on income and market values, which have resulted in reduced assessments, and consequently reduced revenue to the affected municipalities. Rhode Island municipalities have chosen to negotiate PILOTs with firms owning facilities in their respective jurisdictions to insure that plant revenues will remain stable over time.
Local assessing units in New York have faced increased court challenges following the advent of divestiture in 1999. Utilizing income and market approaches in addition to the cost approach would provide more defensible valuation methodology in this changing environment. However, it is both difficult and costly for the smaller assessing jurisdictions to apply all three approaches using only their own resources, which increases the likelihood that they will request advisory appraisals from SBRPS. Given the instability of market conditions at present, it is expected that requests for advisory appraisals will not abate for some time.
In 2002, legislation was enacted in New York that would reduce the influence of power plant assessments on the apportionment of school district and county tax levies (where these taxing jurisdictions encompass more than one assessing unit). School districts and county governments now have the option of excluding the taxable liability of "designated large properties" from the respective overall tax levies. In some instances, it has been found that such properties have been assessed at significantly higher percentages of value than other property in the assessing jurisdiction. In other instances, assessments have suddenly dropped through court action, and also when income and market approaches are used to value such large facilities as power plants. By exercising this option, counties and school districts have the capability to eliminate tax disparities among smaller non-plant properties, so that comparable residences in different towns within a school district will pay the same amount in school taxes.
Local assessing units in New York also gained the ability to remove nuclear power plant parcels from taxable status by entering into PILOT agreements with plant owners. This approach sidesteps potential grievances by plant owners for a period of time, with the expectation that market conditions for these facilities will stabilize by the time the PILOT agreements expire. The legislation, enacted into law in 2001, permits locally affected taxing jurisdictions to enter into multi-year PILOT agreements for a period that can extend up through the 2015 roll year. Under such agreements PILOTs would be required for the term of the exemption, and would be based on taxes that were paid in the last taxable year, unless the local government and plant owner agreed on a different payment schedule. As of February 2005, all seven nuclear facilities in the state are covered under these special PILOTs, and thus are not currently subject to property taxation.
The number of state government employees involved in the valuation and apportionment of railroad and utility property is shown in Table 1. In the past decade, the total number of such employees has fallen by just over 10 percent. Two states have no central assessing functions, and thus have no staff (Delaware and Hawaii). Five states each have staffs of ten or more employees. New York's staffing (at 56) ranks first, followed by California (at 43). California's staff is responsible for valuation/apportionment of all the property of railroads and utilities, whereas New York's staff values only a portion of railroad and utility property (utility property operating in the public way and assessment ceilings on railroad property), and provides advisory appraisals on utility property as requested by municipalities in years of reassessment. All states other than New York and California have staffs of 14 employees or less, and in many cases the staff accomplishes the entire assessment/apportionment function for railroad and utility property. Thus, it is apparent that substantially greater state resources are expended in New York than in any other state for ad valorem taxation of railroads and utilities.
Despite the advent of deregulation and restructuring of the electrical generating industry in much of the country, the dominant model appearing in this survey remains centralized assessment and apportionment of system property, with application of all valuation approaches that are theoretically relevant and practically feasible. This model is in dramatic contrast to the system currently used in New York.
In New York the system used remains highly fragmented, with both SBRPS and local assessors heavily involved in assessing railroad and utility property. The line that divides the state and local roles for utilities is based on the location of the property, so the state and local governments are effectively valuing the same type of property. In the case of railroads, they are not only valuing the same kind of structures and equipment: they are actually valuing the very same property (i.e., it is valued twice). The purpose behind this peculiar (and among the states, unique) division of responsibilities between levels of government is not readily apparent. The resulting fragmentation and duplication leads to misallocation of resources, determination of values for complex properties without the appropriate expertise in certain instances, and inflexibility in valuation applications. Like New York, most other states do in fact have both central and local assessing, but they generally authorize state assessment of property comprising the operations, or systems, of utilities and railroads, and assign assessment of non-system properties to local assessors.
For both railroads and utilities, a relatively high level of expertise is required to establish value. It is both uneconomical and redundant to establish such expertise in the many assessing jurisdictions where this widely distributed property is located. Most states have solved this problem with central assessing of system property, at least for transmission and distribution property, but New York's statutes seem to have dealt with this problem only through the advisory appraisal mechanism. Given the complex nature of utility property, and the presence of this type of property in every local assessing unit, the potential likelihood of discrepancies resulting from separate local valuations is great, and the likelihood of each assessor becoming well versed in the required accounting and engineering knowledge is quite small.
In states where utility property is valued locally, there has been a shift away from sole reliance on the cost approach, and toward use of all three major approaches to value. Where the cost approach is used, original cost is used more often than RCNLD. Since this methodology can be readily obtained from the subject companies whose properties are being valued. RCNLD requires considerably more effort, both in time and in personnel, to produce values that are defensible by state agencies. As indicated in several state profiles, staffing levels are low, and with persistent fiscal difficulties since 2000, such states are unlikely to add personnel required to implement RCNLD effectively.
In cases where economic conditions are too volatile, owners and taxing jurisdictions in question have entered into PILOT agreements, and a few states have offered partial financial assistance to affected localities as a result of reduced assessments on utility properties valued through income and market approaches.
While New York does provide a state advisory appraisal service for locally assessable utility property, these advisory appraisals have given greater weight to the income and market approaches, especially on merchant power plant properties. Even so, the resulting appraisals are not binding. Furthermore, sub-county assessment jurisdictions may balk at being billed by the state for court defense of state-set special franchise values or railroad ceiling values. The advisory approach is thus not an ideal solution to avoiding local valuation discrepancies, and it can potentially result in wasted effort and it leaves the door open to state-local arguments over value.
New York has traditionally relied on the cost approach for railroads and utilities. This choice of approach reflects both data availability and court decisions that favored the cost approach. However, it also reflects New York's lack of a unitary method to valuing the type of property in question. Without unitary valuation, it is virtually impossible to apply the income and market approaches to properties for which it has statutory authority to value, which the majority of states apply along with cost in attempting to capture the true worth of a company's property. For example, growing profitability may well not be reflected in cost-based values during times of low inflation, especially for the more established companies whose rate of new fixed investment is low. New types of utilities, having little or no earnings history, may well be valued most effectively by the cost approach. However, where technology is older and where an earnings history is available, reliance on the cost approach is insufficient; income- and/or market-based values should also be determined. While adoption of the unitary approach in New York may appear at first to be complex, ft must be remembered that most other states have successfully adopted this approach and have even devised uniform procedures for allocation of value among the states and to local taxing jurisdictions.
New York has devoted plentiful resources in applying the reproduction cost approach to valuing properties under its purview: property operating as a special franchise, and interstate and intrastate railroads (for limited or ceiling assessments). As this approach examines physical, functional and economic factors affecting the cost to replace and depreciation (RCNLD), these values especially depreciated values are often at loggerheads with values contained in the accounting books by the owners. By contrast, cost valuation according to book cost (or original cost) is relatively simple to develop, requiring less time and personnel for the assessing jurisdiction. However, using book cost normally produces lower assessed values than does RCNLD. States using original cost do not necessarily rely solely on this approach, but will also consider income and market approaches where feasible.
New York, along with other states, has been facing rapid changes in the technology and regulatory environment of the utility industry. Merchant power plant owners as well as owners of utilities and railroads have not hesitated to challenge local assessments as they have become more subject to competitive forces and lose the protections of regulation. Increasing court challenges exert significant fiscal pressure on New York local governments, for many of the properties in question are large installations that comprise a significant share of the tax base. Local assessors can find themselves in a difficult situation when faced with the task of defending assessments of such complex properties against the well-prepared challenges that large companies can mount.
New utilities, emanating from new technologies, are also developing at a rapid pace, and there is no sign that technical change is slowing down perceptibly; in fact, the situation is quite the reverse. Such rapid technical change, together with increasing competition in the industry, complicates the job of assessors in New York's smaller assessing units . It is apparent that an appropriately trained central assessing staff would be better able to develop, administer, and defend utility and railroad assessments than would local assessors in many small communities throughout the state. The potential savings resulting from a central assessment of utility properties could also be passed on to assessing units, who currently are billed pro rata for expenses incurred by the state for defending against court challenges on special franchise assessments. Furthermore, beyond local board and State Board hearings, assessment grievances could be adjudicated more expeditiously through a body specifically devoted to valuation and taxation, such as a tax tribunal, administrative law court or other independent body. Grievances are adjudicated through this general mechanism in approximately two-thirds of the states.
New York currently has a central assessing staff that is relatively large when compared to the staffing found in other states. However, without a unitary system of valuation, this group lacks the ability to develop the values most reflective of the enterprises in question. Adoption of a unitary approach and centralized assessing/apportionment would thus require, as a necessary precondition, enactment of appropriate enabling legislation. It would entail a basic, fundamental change in the way railroad and utility values are determined, tantamount to virtual abandonment of current procedures. However, it would clearly result in application of greater levels of expertise and flexible use of valuation techniques, and this in turn would produce values more reflective of the worth of railroad and utility property.
The remainder of this report describes in detail the procedures employed in all the states surveyed. |