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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.

The railroad maintenance tax credit — or 45G credit, as it is called after the section of the revenue code in which it appears — is a shining example of seemingly temporary provisions in the tax code that have become entrenched features of the business tax landscape. Born of apparent good intentions in 2004, the rail maintenance provision has been extended twice, in 2008 and 2010. It is now being considered for another renewal, along with dozens of other targeted tax breaks for businesses and individuals collectively known as “extenders,” even as Congress tries to close the country’s gaping annual deficits and find alternatives to crushing automatic increases in tax rates for individual filers.

The provisions have survived verbal attacks against “crony capitalism” and calls from all sides for a simpler, more predictable tax code. They’re so embedded in the tax code that they’re not really even anomalies any longer since the entire tax system, with its expiring individual rates and tax “holidays,” has come to resemble a giant extenders package.

Origin Stories

Doing away with tax extenders has been as difficult as changing the course of major rail lines.

Earlier this year, a House Ways and Means subcommittee held a hearing that spoke to the difficulty of overhauling the tax code. Ostensibly held to provide a critical look at individual tax extenders, it consisted largely of members of Congress testifying to the benefits of everything from tax deductions for Puerto Rican rum producers to accelerated write-off periods for the costs of motor sports complexes.

A consistent theme was the virtue of providing tax relief to small business, and that’s the narrative the American Short Line and Regional Rail Association and its lobbying firm, Chambers Conlon and Hartwell, have pushed.

According to a 2011 ASLRRA booklet, “the story of the short-line industry is the story of local entrepreneurs saving and rehabilitating the previously money-losing branch lines of Class I Railroads” such as Union Pacific. If not for these entrepreneurs, the railroads might have been “abandoned and lost forever.”

According to several studies on the subject, the largest railroad companies began to sell off sections of track that were considered remote and difficult to maintain once given the opportunity under railroad deregulation Congress enacted in 1980. But many in the railroad industry saw this as an important step in meeting rational supply-and-demand dynamics in the marketplace. It immediately allowed some businesses to specialize and profit from short lines, which were still an important part of the country’s rail network.

After small, independent railroad companies proliferated in the 1980s, major consolidation began in earnest in the 1990s. A 2002 Transportation Quarterly article stated, “By far the leading fuel of growth [of the short-line railroad industry] has been the entry of holding companies that own multiple railroads.”

But short lines also face major challenges. Around 2000, ASLRRA started pointing to moves by the major railroad companies to introduce heavier freight cars that required short-line companies to invest in sturdier tracks to accommodate the loads.

ASLRRA began lobbying for legislation to help with the equipment upgrade.

In 2004, the trade group won a four-year railroad tax credit, estimated to cost the government $501 million, that was among several corporate tax cuts included in legislation (PL 108-27) that replaced a tax break for exporters that had been ruled illegal by the World Trade Organization.

Symbiotic Relationships

ASLRRA originally said it was only asking for a temporary tax credit to cover part of the $7 billion it estimated was necessary to invest in new rails. But that message has changed over time.

In its latest lobbying push to extend the credit, the group has emphasized the recent success of short-line railroads in specific congressional districts across the country.

It has promoted legislation that would continue the tax credit through 2017 “to provide important long-term planning certainty necessary to maximize private sector transportation infrastructure investment.”

Like other temporary tax provisions, the railroad maintenance credit has created new, symbiotic relationships. Since 2004, ASLRRA’s spending on lobbying and Genesee’s support of a political action committee that has spent on political campaigns have both roughly doubled, according to the Center for Responsive Politics.

In the 2012 election cycle, Genesee gave money to a variety of congressional tax writers, including Jenkins. It was the second-largest contributor to Rep. Earl Blumenauer of Oregon, the lead Democratic co-sponsor of the bill (HR 721) to extend the 45G credit, who has said he supports freight rail for environmental and economic reasons.

Genesee & Wyoming also operates a rail line in Oregon that runs through Blumenauer’s Portland district.

The Tax Policy Center’s Marron says the economy as a whole would be better off if Congress turned the current view of extenders on its head. Instead of assuming that most temporary tax breaks will be continued, lawmakers should “move to a system in which the presumption, rebuttable to be sure, is that expiring provisions will expire unless supporters can justify their continuation,” Marron said. “In short, they should be the expirers.”

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