RAILROAD-SHIPPER TRANSPORTATION ADVISORY COUNCIL

Washington D.C.

**Position Paper**

**Section 45G Railroad Track Maintenance Credit**

**and the Short Line Railroad Investment Act of 2007**

**May 2007**

**Section 45G Railroad Track Maintenance Credit**

The Railroad-Shipper Transportation Advisory Council (RSTAC) is charged
to provide a private sector forum for the discussion of matters of
concern to small rail shippers and small railroads and to provide advice
on regulatory, policy and legislative matters to the Surface
Transportation Board (STB), Secretary of Transportation and Congress.

The continued survival and viability of America's short line and
regional railroad network is one of the greatest areas of concern to
small shippers and small railroads. Short line and regional railroads
are predominately light density lines that connect communities and
railroad customers to the national freight railroad network. Short line
railroads operate in 49 states, and in 30 states they operate at least
one quarter of the state's rail network. Over 550 short line railroads
preserve nearly 50,000 miles of track serving 12,000 customer
facilities. Without short line railroads the majority of this track
would have been abandoned long ago and thousands of railroad customers
would be disconnected from the national railroad network.

Much of the infrastructure acquired by short line railroads in the past
three decades received little investment by previous owners and must now
be upgraded if small shippers and rural America are to stay connected to
the national railroad network. The upgrade is made more urgent as the
demand for heavier rail cars has made the 286,000-pound car the industry
standard. Private and government studies (1) indicate it will cost
between \$7 and \$11 billion to upgrade the national short line system
to ensure that communities and shippers can safely and efficiently
receive freight by rail in the future.

Freight rail transportation is much more energy efficient than its main
competing mode of transportation, the trucking industry. Short line
railroads use approximately 184 million gallons of fuel to move 10.6
million carloads of freight annually. Trucks would require 540 million
gallons to move the same freight. For example, if all freight shifted
from short lines to trucks, the impact on the economy of additional
diesel fuel costs would be \$1.068 billion at \$3 per gallon of diesel
fuel. Short lines save shippers 20% to 50% over comparable truck
transportation. Short lines take 30 million truckloads per year off the
highway, saving \$1.3 billion per year in highway damage costs. (2)

In recognition of these public benefits, in 2004 Congress enacted the
Section 45G railroad track maintenance tax credit as part of the
American Jobs Creation Act (Public Law No. 108-357). The House bill, HR
876, had 267 co-sponsors, more than any other substantive piece of
Legislation in the 108th Congress, and enjoyed broad bi-partisan
support, the support of shippers from across the nation and the support
of rail labor organizations. The Section 45G credit provides a 50
percent tax credit for qualified railroad track maintenance expenditures
made by railroads, and railroad customers, contractors, and suppliers.
The maximum credit per year that may be earned from improvements to a
railroad is capped at \$3,500 per total railroad mile. The Section 45G
credit encourages the support of railroad customers, contractors, and
suppliers to preserve and maintain the short line railroad network
including short line railroads owned by local and state government.
Unless extended by Congress, the Section 45G tax credit will expire at
the end of 2007.

**Short Line Railroad Investment Act of 2007**

As the original advocates for the creation of Section 45G, Senators
Blanche Lincoln (D-AR) and Gordon Smith (R-OR), and Representatives Earl
Pomeroy (D-ND), Dave Camp (R-MI), and Jerry Moran (R-KS) recognize the
importance of small shippers and small railroads. In an effort to
continue and improve upon the Section 45G credit, these Senators and
Representatives have introduced S. 881 and H.R. 1584, the Short Line
Railroad Investment Act of 2007.

This legislation seeks to extend the Section 45G credit for an
additional three years through 2010, provide relief from the alternative
minimum tax (AMT), allow short lines created in 2005 and 2006 to qualify
for the credit, and increase the mileage based credit limitation from
\$3,500 to \$4,500 per track mile.

Congress should take affirmative action to extend the Section 45G tax
credit, so it will not expire at the end of 2007. Since small railroads
must begin to plan their 2008 capital and maintenance budgets during
2007, Congress must extend this credit as early as possible in 2007 to
avoid a reduction in rail improvements during 2008 and beyond.

In 2004, Congress estimated that the Section 45G tax credit would
generate \$501 million in tax credits. Therefore, improvements must be
made to the legislation to ensure that this intended investment level
can be achieved. The alternative minimum tax (AMT) has prevented many
railroads from utilizing the investment incentive provided by Section
45G. By drastically reducing, or in many cases eliminating the ability
to use the credit contemporaneously with qualified expenditures, the AMT
has removed the economic incentive for many short lines to increase
investment in track improvements. The Short Line Railroad Investment Act
would reduce the impediment to investment caused by the AMT.

Over the past two and a half years, the Section 45G credit has assisted
short line railroads and their shippers in making hundreds of millions
of dollars in short line infrastructure investments. These investments
have improved safety, efficiencies, and service offerings to all
shippers. In recognition of the benefits provided to small shippers and
small railroads by Section 45G, RSTAC commends Congress for the original
enactment of the Section 45G credit. RSTAC urges the extension and
improvement of the credit as called for in S. 881 and H.R. 1584 before
Section 45G expires at the end of 2007.

(1) 286,000 needs study, Zeta-Tech, September 2002; Railroad Shipper
    Transportation Advisory Council, White Paper III, April 2000, based
    on 1999 survey by American Association of State Highway and
    Transportation Officials (AASHTO).

(2) Short Line Data Study, Texas Transportation Institute, 2003.