ASLRRA PERSPECTIVE, RAILWAY AGE OCTOBER 2024 ISSUE: The Short Line Railroad Rehabilitation Tax Credit known as 45G was originally enacted as a three-year provision in 2004. The tax credit was extended six times and finally made permanent in 2020.
Each Congress, legislation to extend the credit secured a huge bipartisan majority of House and Senate co-sponsors. It attracted overwhelming Congressional support for the best of all reasons: because it worked exactly as intended to maximize capital investment required to preserve railroad service in small town and rural America.
45G allows a credit of 40 cents for each dollar the railroad invests in track and bridge improvements, up to a cap of $3,500 per track-mile. The credit allowed an industry that operates 50,000 miles of track, nearly 30% of the national freight rail network, to bring back to life previously under-maintained branch lines headed for abandonment. A success story to be sure, but a story that needs a new chapter.
Many short lines must still invest north of 25% of their revenues to maintain and improve track and bridges required to handle modern freight cars, increase capacity and improve safety. It is estimated that there is a backlog of more than $12 billion of improvements still to be completed, a heavy lift for an industry that earns just 6% of the revenue of the total U.S. freight railroad industry. The tax credit remains a powerful tool to address that backlog, but inflation and restrictions on eligible track are eroding its potency.
Costs to maintain and upgrade railroad track are significantly higher today than 20 years ago—$3,500 just doesn’t buy what it used to, whether it’s wood ties, steel track, ballast, track machines, or the skilled labor necessary to install and maintain any of it. Based on the STB-published Rail Cost Adjustment Factor, the credit cap per mile would need to increase from $3,500 to $6,100-$6,900 to maintain its original purchasing power. Additionally, expenditures on track that became a short line after Jan. 1, 2015, are ineligible for earning the credit.
The good news? The solution is straightforward and embodied in legislation recently introduced by Reps. Mike Kelly (R-Pa.) and Earl Blumenauer (D-Ore.) in the House (H.R. 9522) and Sens. Ron Wyden (D-Ore.) and Mike Crapo (R-Idaho) in the Senate (S. 5008). The legislation increases the credit cap to $6,100 per mile, indexes the cap to inflation going forward, and allows eligibility for all current short line track.
On Sept. 19, short line representatives from across the country came to Washington, D.C., to promote the legislation and seek co-sponsors. While we do not expect this tax legislation to be brought up in these last few weeks of the 118th Congress, there will very likely be a tax bill in the 119th Congress to address a large group of expiring 2017 tax provisions. Our goal is to get a jump on this issue so we can start strong with a new Congress in 2025.
That new Congress will have close to 200 Members who were not in office when 45G was last considered in 2020, and most will know little about the workings of the credit and its benefits. For those Members who were in office back then, a refresher course cannot hurt. Our Sept. 19 participants came armed with the following top five reasons to support this legislation.
1. Maximizing private infrastructure investment: The credit requires a dollar of private investment to earn 40 cents of tax credit. The government is not giving us a dollar, but rather letting short lines invest more of what they earn in maintenance and improvements. The additional spending power allows short lines to speed up projects that are in the works and take on new projects that would otherwise be unaffordable. Since 2005 short lines have invested tens of billions into their infrastructure and a very meaningful portion of that was made possible by the tax credit.
2. Creating jobs: Railroad rehabilitation is labor intensive. As small businesses, most short lines do not have the in-house labor force or specialized equipment needed so must hire contractors for most of this work. The FRA estimates that 50% of every rehabilitation dollar goes to labor.
3. Benefitting shippers: Railroad customers are the ultimate beneficiaries of the credit. Short lines operate in areas no longer served by the Class I railroads. Efficient and reliable short line connections to the national network are absolutely essential for shippers to serve their customers, receive their raw materials, and compete for business. And shippers receive substantial competitive benefits by using rail. Take for example Farmrail, a typical agriculture-area short line. Farmrail’s cost of moving the 95 miles from Clinton to Enid, Okla., is $6.10 per mile versus $8.25 per mile for comparable truck service. That cost advantage is duplicated on virtually every short line in the country.
4. Buying American goods and services: Railroads are an all-American proposition. They can’t take their operations or jobs overseas and virtually everything they buy to improve their infrastructure—the ties, the rail, the ballast, the signal systems—are made in America. The American railroad supply industry is the most vibrant in the world, employing tens of thousands of Americans and it is railroad spending that keeps it that way.
5. Improving Safety: Every dollar invested in improving railroad track and bridges is an investment in a safer railroad. For short lines, the leading cause of derailments is simply bad worn-out track, which the credit helps us address. According to FRA data, short line derailments have been reduced by 50% since the credit was enacted.
We believe it is a compelling case, and we intend to aggressively pursue that case as soon as the new Congress begins its work.
