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Railroad Maintenance: One Tax Credit That Is All but Permanent

Karen Bleier/AFP/Getty Images
The railroad maintenance tax credit — which can offset up to 50 percent of the amount a freight carrier spends on maintaining its infrastructure — exemplifies temporary provisions in the tax code that have become entrenched features of the business tax landscape.

Genesee & Wyoming Inc. might not generate nearly as much revenue as the large freight carriers such as Union Pacific Corp., but the regional railroad company has carved out a lucrative operation by buying up short-line railroads that connect businesses to the country’s major, cross-continental rail networks.

The Greenwich, Conn.-based company, which counted $829 million in revenue and $119.5 million in after-tax profit last year, purchased its largest rival, RailAmerica Inc., for $1.4 billion in July, bringing more than 15,000 miles of track in the United States, Canada and Australia under its control, pending the expected approval of regulators.

Genesee’s business model is simple enough, for the most part, with revenue built on charging shippers to transport materials such as coal and lumber. But for the past seven years it has found some significant yields from a federal tax credit that can offset up to 50 percent of the amount that the company spends on repairing and maintaining its railroads.

Although the maintenance provision is relatively obscure even in the tax world, it’s a valuable tax break for short-line railroads. In its 2011 annual report to shareholders, Genesee said its tax bill had been reduced by $9.9 million, or 6.5 percent, due to the credit, and that it had $33.2 million worth of unused credits available to offset future taxes. RailAmerica also used the credit to reduce its tax liability by $22.6 million in 2011.

Behind Genesee’s generous subsidy is a decadelong lobbying effort to get, and then keep, its special place in the tax system, one that speaks volumes about the history, complications and entrenched interests Congress faces as lawmakers try to cope with the impending tax increases and automatic budget cuts known as the fiscal cliff.

“There is much disagreement about what tax reform should look like, but there is a growing bipartisan consensus that the tax code should encourage capital investment in small entrepreneurial American business,” Rep. Lynn Jenkins, R-Kan., said at a hearing this year on the temporary tax measures known as extenders.

There are dozens of such extenders in the tax code totaling billions of dollars in benefits to favored businesses and industries. Some get attention at various times, such as when the $12 billion annual tax break for wind energy came up during the 2012 presidential campaign, but usually they are tucked quietly and little noticed into the tax code.

Some say they come at a cost that goes beyond lost revenue, however. As a whole, tax extenders “create uncertainty, complicate compliance and cost needed revenue,” Donald Marron, the director of the Urban-Brookings Tax Policy Center, said at a recent congressional hearing.

Such tax breaks are seemingly primed to be plucked for needed revenue, but getting at them is hardly that simple. In this case, many lawmakers who promote the rail benefit say it helps lift local economies that would sink if cash-strapped small railroads were not there to serve the small businesses in their communities.

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