CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

A

PAPER

JANUARY 2006

Freight Rail

Transportation:

Long-Term

Issues

CBO

© Royalty-free/Corbis

The Congress of the United States O Congressional Budget Office

CBO

Freight Rail Transportation:

Long-Term Issues

January 2006

A

PAPER

Preface

The demand for freight transportation in the United States has been rising—reflecting 

growth in the economy—and is expected to continue its upward trend. Policymakers and 

transportation experts have expressed concern about whether the railroads will be able to keep 

pace with rising demand.

This Congressional Budget Office (CBO) paper—prepared at the request of the House Committee on Transportation and Infrastructure—reviews trends in the demand for and supply of 

freight rail transportation. After many years of reducing the amount of track and equipment 

and reducing the size of their workforce, the railroads have begun to increase their capital 

stock and hire new workers. This paper identifies factors that might affect the railroad industry’s investment decisions.

In keeping with CBO’s mandate to provide objective, impartial analysis, the paper makes no 

recommendations.

Elizabeth Pinkston of CBO’s Microeconomic Studies Division wrote the paper under the 

supervision of Roger Hitchner, Joseph Kile, and David Moore. (Roger Hitchner has since left 

CBO.) Angela McCollough and Craig Cammarata assisted with the preparation of the manuscript and figures. Within CBO, Naomi Griffin, Arlene Holen, Fatimot Ladipo, Rachel Milberg, Robert Murphy, Christopher Williams, and Thomas Woodward provided comments on 

the draft. In addition, John Frittelli of the Congressional Research Service, Robert Martin of 

the Federal Railroad Administration, Michael Redisch of the Surface Transportation Board, 

and Louis Thompson of Thompson, Galenson & Associates provided comments. (The assistance of external reviewers implies no responsibility for the final product, which rests solely 

with CBO.)

Janey Cohen edited the paper, and Christine Bogusz and John Skeen proofread it. Maureen 

Costantino designed the cover and prepared the paper for publication, and Lenny Skutnik 

produced the printed copies.

Donald B. Marron

Acting Director

January 2006

Contents

Summary and Introduction 1

Recent Experience 2

Long-Term Issues 2

The Demand for Freight Rail Transportation 3

The Role of Freight Railroads Today 3

Trends in Freight Rail Transportation 4

Projections of Growth in Demand for Rail Transportation 5

Meeting Future Freight Transportation Demand:

The AASHTO Report 6

The Supply of Freight Rail Transportation 7

Railroad Costs 9

Railroad Productivity 11

Financing Railroad Investment 11

Prices 11

Profitability 15

Factors That Might Affect Railroad Investment 16

Ownership of Infrastructure 16

Railroad-Specific Laws 17

Policy Options 21

Policies Related to Ownership of Infrastructure 21

Policies Related to Railroad-Specific Laws 23

Table

1. Freight Rail Traffic, 1998 and 2020 (as Forecast by the

Freight Analysis Framework), by Major Commodity Group 10

Figures

1. Intercity Freight Traffic, 1965 to 2000 5

2. Freight Carried by U.S. Railroads, 1890 to 2003 6

3. Composition of Class I Railroad Traffic, 2004 7
VI FREIGHT RAIL TRANSPORATION: LONG-TERM ISSUES

4. Freight Transported by U.S. Railroads, 1994 to 2004 8

5. Distribution of Rail Traffic in 2020 as Projected by the

Freight Analysis Framework 9

6. Train-Miles per Track-Mile for Class I Railroads,

1978 to 2004 11

7. Railroad Equipment in Service, 1955 to 2003 12

8. Capital Expenditures of Class I Railroads, 1990 to 2003 13

9. Railroad Employment, 1955 to 2003 14

10. Productivity Growth, 1958 to 1999 15

11. Producer Price Indexes, 1969 to 2004 16

12. Producer Price Indexes, 1997 to 2004 17

13. Rail Rate Index, Measured in Revenue per Ton-Mile,

1984 to 1999 18

14. Comparison of BLS and STB Rail Price Indexes,

1984 to 1999 19

15. Cost of Capital and Return on Investment, 1990 to 2003 20

Figures (Continued)
Freight Rail Transportation:

Long-Term Issues

Summary and Introduction

The freight railroad industry plays an important role in 

the nation’s economy as a mainstay of transportation for 

many basic industries and, increasingly, for exports and 

imports that travel by rail to and from the nation’s ports. 

After a long period of excess rail capacity, the pendulum 

has begun to swing toward tight capacity—at least at certain times and places.1

 Some transportation experts have 

expressed concern that the railroads are not investing 

enough to meet rising demand for their services. If they 

cannot keep pace, the result could be higher costs not 

only for shippers and consumers but also for taxpayers, 

because demand that the railroads cannot satisfy is most 

likely to be handled by trucks and thus require more 

spending on the construction and maintenance of highways.

The concern expressed about the availability of supply 

implies a view that the railroad industry is somehow different from most other industries. Most companies in a 

market economy respond to increases in demand by raising prices, which increases revenues and profits that can 

then be used to finance expansion. The prospect of profits not only induces existing firms to expand but also attracts newcomers to the industry.

Why might the railroad industry not respond to rising 

demand as other industries do? Economic factors specific 

to the railroad industry may reduce its ability and willingness to invest in new capacity. Building new track is 

costly, and because track is fixed in a specific location, investing in it subjects railroads to the risk that demand will 

shift to other locations and that the investment will not 

yield an adequate return. The other major domestic 

freight transportation industries, trucking and water carriers, do not face that kind of risk; instead, the governments that build and maintain highways and waterways—and the taxpayers who provide their funding—

bear that risk.

Government policies may also adversely affect railroads 

by reducing the costs of competing industries. Although 

truckers and water carriers pay taxes that help finance the 

highways and waterways they use, those taxes do not fully 

cover the cost of the infrastructure. The Federal Highway 

Administration has estimated that tractor-trailer trucks 

pay only 80 percent of the highway costs attributed to 

them, and the heaviest trucks—those over 80,000 

pounds—pay only half of their costs.2 Barge operators on 

the inland waterways pay in taxes only about 20 percent 

of the amount the Corps of Engineers spends on navigation projects.3

Still another factor constraining potential railroad investment could be laws that are specific to railroads, which 

were enacted when the railroad industry was a dominant 

force in the U.S. economy. Some of those laws may benefit railroads, but others may impose costs. From 1887, 

1. In the transportation industries, “capacity” is usually defined in 

terms of a level of service, such as how many cars or trains can be 

handled efficiently and effectively by a facility or network in a 

given amount of time. Excess capacity exists when inputs—tracks, 

equipment, and labor—could be used to produce more service 

than they are currently providing. Capacity becomes constrained 

when any critical input is in tight supply.

2. Department of Transportation, Federal Highway Administration, 

Addendum to the 1997 Federal Highway Cost Allocation Study Final 

Report (May 2000). The Federal Highway Administration’s estimate includes only government program costs; it does not include 

pollution or congestion costs.

3. The costs include construction as well as operation and maintenance.
2 FREIGHT RAIL TRANSPORTATION: LONG-TERM ISSUES

when the Interstate Commerce Act was passed, until 

1980, railroad rates, routes, mergers, abandonments, and 

other economic activities were heavily regulated by the 

federal government.4

 The Staggers Rail Act of 1980 removed many of the regulatory restrictions, enabling railroads to operate more efficiently.5 But some regulation 

remains, such as regulation of rates on traffic for which 

the Surface Transportation Board (STB) finds that one 

railroad dominates the market, to protect “captive shippers” that have no alternative transportation. Other laws 

that treat railroads differently from most other industries 

are the Federal Employers’ Liability Act (enacted in 1908 

to cover workers’ compensation), the Railway Labor Act 

(enacted in 1926 to cover various aspects of collective 

bargaining), and the Railroad Retirement Act (originally 

enacted in 1934 to provide pension coverage). There has 

been little research to address whether those railroadspecific laws adversely affect the railroads in their competition with other modes of transportation.

This paper discusses the growth in demand for freight 

transportation and explores factors that may affect the 

railroads’ ability to meet future demand. In general, data 

on trends in costs, productivity, and profitability suggest 

that the railroad industry has been moving forward in 

adding to capacity, although the picture is not entirely 

clear. By several measures, the amount of capital investment in the railroad industry has been fluctuating or declining; employment is well below its historical peak and 

has been drifting downward until recently. Yet productivity has risen markedly, enabling the railroads to provide 

more transportation services with fewer resources.

Government policies that affect railroads often affect 

other transportation industries, and vice versa. If an aim 

of public policy is to encourage efficiency across transportation modes—that is, for railroads, trucks, and water 

carriers to carry the types of shipments for which they are 

best suited—then any policy changes should comprehensively consider the effects on all modes.

Recent Experience

In 2004, shippers and policymakers were sufficiently concerned about the ability of railroads to meet unprecedented demand that the chairman of the Surface Transportation Board asked the heads of the seven major 

freight railroads about their plans for meeting the upsurge.6

The railroads responded that they were taking a number 

of measures—hiring more workers, adding more locomotives and cars, rerouting traffic, and seeking help from 

shippers—to accommodate the rising demand. By the 

end of the fall peak season, the railroads had been able to 

meet most of the demand, and the feared “meltdown”—

as it was referred to in the press—had been avoided.7

 Demand has remained strong, however, and in June 2005, 

the STB chairman again asked the railroads how they intended to meet the demand for the coming fall peak season.8 The railroads cited continued efforts to increase capacity. It appears that actions by both shippers and 

railroads in anticipation of rising demand have mitigated 

congestion in 2005.9

Long-Term Issues

Over the next 20 years, if demand for rail transportation 

continues its rapid rise, the railroads will need to invest in 

new tracks and equipment to keep pace. At least two major transportation organizations have expressed concern 

about whether capacity will be sufficient to meet freight 

demand. The Transportation Research Board (TRB, a 

unit of the National Academies) appointed a special com4. As initially enacted, the Interstate Commerce Act provided relatively weak regulation, but regulatory controls were increased substantially in ensuing legislation.

5. The Staggers Rail Act of 1980 (Public Law 96-448, 49 U.S.C. 

10101 et seq.).

6. Letter from Roger Nober, Chairman, Surface Transportation 

Board, to the heads of the seven Class I freight railroads, June 9, 

2004, available at www.stb.dot.gov/stb/docs/fallpeakletter.pdf. As 

the successor to the Interstate Commerce Commission, the STB 

has jurisdiction over certain economic aspects of the rail industry. 

The Federal Railroad Administration regulates rail safety.

7. Congressional Budget Office, Freight Rail Transportation: A 

Review of the 2004 Experience (May 2005).

8. Letter from Roger Nober, Chairman, Surface Transportation 

Board, to the heads of the seven Class I freight railroads, June 15, 

2005, available at www.stb.dot.gov/stb/docs/fallpeakletter

2005.pdf.

9. See, for example, Laura Mandaro, “Ports, Rails, Retailers Plan 

Ahead to Avoid Import Logjam Again; Ship Early, Work Late,” 

Investor’s Business Daily, National Section (August 15, 2005), p. 

A01. Track problems recently have caused disruptions in coal service by the Union Pacific Railroad and BNSF Railway from the 

Powder River Basin in Wyoming. Hurricane Katrina has also 

caused damage to key rail lines.
FREIGHT RAIL TRANSPORTATION: LONG-TERM ISSUES 3

mittee to study potential problems. The committee 

found that “Rail capacity constraints and recent service 

problems are discouraging to the hopes of state and federal officials, environmentalists, and motorists that rail 

can relieve highways of part of the burden of truck traffic 

growth.”10 The report further summarized concerns 

about rail capacity over the long run:

Taken together, the trends have indicated to 

many observers a pattern of unprecedented 

tight capacity in certain parts of the freight 

transportation system, expected continued 

growth of traffic, and slowing of the rate of addition of capacity in response to various

external constraints.11

The American Association of State Highway and Transportation Officials (AASHTO) also commissioned a 

study of future rail capacity and demand. The resulting 

Freight-Rail Bottom Line Report examined the need for future highway investments under alternative assumptions 

about the potential contribution of railroads to meeting 

freight transportation demand.12 Based on what railroads 

had been spending on investment, it found that the railroad industry would be unable to generate enough funds 

for investment to maintain its current share of freight 

transportation.13

More recently, a report issued by the Hudson Institute expressed similar concerns, concluding that “given little or 

no change in government programs and policies there are 

likely to be significant strains on the capacity of the national freight system over the next 10 to 20 years.”14

Among other sources of demand, the report noted that 

the growth in international trade may require better 

transportation service between ports and inland cities.15

In recent years, the railroads have been making new investments, even though their profitability has fluctuated 

and has generally remained below the cost of capital as estimated by the Surface Transportation Board. They have 

increased productivity markedly and increased employment in 2004 after decades of steady employment declines. They have been able to raise prices on some traffic, 

despite the fact that overall revenue per ton-mile has generally declined.16 Those developments may ease concerns 

about the ability to meet future demand, although it is 

unclear whether the railroad industry will invest quickly 

enough to avoid disruptions.

The Demand for Freight Rail

Transportation

The demand for freight transportation is derived from 

the demand for the goods themselves. No intrinsic value, 

or utility, arises from moving a trainload of coal, grain, or 

imported goods; rather, the value of the transportation 

derives from the value of consuming or using the good at 

its destination. 

The demand for freight transportation depends primarily 

on the overall amount of economic activity; the type of 

economic activity (for example, the relative amount of 

goods, which have to be transported, and services, which 

do not); and the location of economic activity (in particular, the distances between the sources of raw materials, 

distribution and production facilities, and consumers). 

The transportation industries are not passive participants 

in the market, however. If they can reduce the cost of 

transportation—by adopting new technologies or finding 

other ways to increase productivity, for example—they 

may be able to increase demand for their services. Indeed, 

the historical progression of trade from local, to regional, 

to national, to international was aided to a large extent by 

reductions in the cost of transportation.17

The Role of Freight Railroads Today

Railroads carry about 47 percent of intercity freight traffic (excluding pipelines and airfreight) in the United 

10. Transportation Research Board, Freight Capacity for the 21st Century, Special Report 271 (Washington, D.C.: National Research 

Council, 2003), p. 19.

11. Ibid., p. 109.

12. American Association of State Highway and Transportation Officials, Freight-Rail Bottom Line Report (Washington, D.C.: 

AASHTO, January 2003), available at freight.transportation.org/

doc/FreightRailReport.pdf. 

13. Ibid., p. 3. 

14. Sergio J. Ostria, “Freight Transportation,” Part II of Hudson Institute, 2010 and Beyond: A Vision of America’s Transportation Future

(Noblesville, Ind.: Hudson Institute, 2004), p. 111.

15. Ibid., p. 91.

16. A ton-mile is the measure of one ton of freight transported the 

distance of one mile.

17. Improved transportation at a lower cost has enabled producers to 

reap economies of scale in production and advantages from specialization.
4 FREIGHT RAIL TRANSPORTATION: LONG-TERM ISSUES

States, measured in ton-miles, and about 30 percent, 

measured in tons.18 In 2003, they carried 1.8 billion tons 

of freight a total of about 1.6 trillion ton-miles.19 Because 

rail rates are generally lower than rates for trucking or airfreight, however, railroads take in only about 13 percent 

of intercity freight revenues—about $36.6 billion in 

2003.20

Railroads carried shipments valued at $320.5 billion in 

2002. By comparison, during the same period, trucks 

transported shipments worth $6.2 trillion, air carriers 

transported shipments worth $279.5 billion, and water 

carriers transported freight worth $90.9 billion.21 The 

value of freight rail shipments in 2002 represented 3.1 

percent of gross domestic product (GDP) for that year; it 

was 10.7 percent of the nonservice (durable plus nondurable goods) portion of GDP.22 The value of rail shipments accounted for nearly 17 percent of the value of 

goods imported into and exported from the United States 

in 2002.23

Rail transportation is particularly important to certain industries. About 70 percent of coal delivered to power 

plants in the United States travels by rail, as do about 70 

percent of all automobiles manufactured domestically.24

Approximately 32 percent of grain shipments are transported by rail.25 The chemical industry also relies heavily 

on railroads.

The railroad industry in the United States is dominated 

by two large carriers in the West, Union Pacific Railroad 

Company (UP) and BNSF Railway (formerly known as 

the Burlington Northern Santa Fe), and two in the East, 

CSX Transportation, Inc., and Norfolk Southern Railway. Those railroads plus three others—the Grand Trunk 

Corporation (a unit of the Canadian National Railway 

Company that includes Grand Truck Western, Illinois 

Central, Wisconsin Central, and smaller railroads), Soo 

Line Railroad Company (a unit of Canadian Pacific Railway), and Kansas City Southern Railway Company—

constitute the set of Class I railroads, as defined by the 

Surface Transportation Board, that are the focus of this 

paper.26 Data for Class I railroads closely track data for 

the entire industry. The use of data for Class I railroads or 

all railroads in this paper reflects whichever are more 

readily available.

Trends in Freight Rail Transportation

Total freight traffic carried by all modes of transportation 

in the United States has been growing. Rail and intercity 

truck traffic, as measured in ton-miles, has risen steadily 

in recent years, while water transportation has declined 

(see Figure 1).

Railroad freight traffic has trended upward over the history of the industry, generally suffering small dips only in 

periods of recession. Railroads experienced a sharp increase in traffic in the 1990s: traffic jumped more than 50 

percent between 1990 and 2003, rising from about 1.0

18. Pipelines are not generally in direct competition with railroads, 

nor is air freight. Air freight accounts for a very small proportion 

of freight tonnage and ton-miles. Ton-mile data are from Department of Transportation, Bureau of Transportation Statistics, 

National Transportation Statistics 2005, Table 1-46a, available at 

www.bts.gov/publications/national_transportation_statistics/

2005/index.html. Tonnage data are from Rosalyn A. Wilson, 

Transportation in America, 19th ed. (Washington, D.C.: Eno 

Transportation Foundation, 2002), p. 44.

19. Association of American Railroads, Railroad Facts, 2004 Edition

(Washington, D.C.: AAR, October 2004), pp. 27-28.

20. Department of Transportation, Bureau of Transportation Statistics, National Transportation Statistics 2005, Table 3-18, available 

at www.bts.gov/publications/national_transportation_statistics/

2005/index.html. The calculation used air freight data from the 

BTS’ Air Profile and Table 3-17 of National Transportation 

Statistics.

21. Department of Transportation, National Transportation Statistics 

2005, Table 1-52, available at www.bts.gov/publications/

national_transportation_statistics/2005/index.html. These numbers double-count the value of goods carried by more than one 

mode.

22. Council of Economic Advisers, Economic Report of the President

(February 2004), Table B-1.

23. Ibid., Table B-24.

24. Association of American Railroads, Economic Impact of U.S. 

Freight Railroads (Washington, D.C.: AAR, November 2005),

p. 2, available at www.aar.org. 

25. Department of Agriculture, Agricultural Marketing Service, 

Transportation Services Branch, Transportation of U.S. Grains: A 

Modal Share Analysis, 1978-2000 (October 2004), p. 10.

26. The STB defines Class I railroads according to a revenue threshold. For 2003, the threshold was more than $277.7 million in 

annual revenues. 
FREIGHT RAIL TRANSPORTATION: LONG-TERM ISSUES 5

Figure 1.

Intercity Freight Traffic, 1965 to 2000

(Billions of ton-miles)

Source: Congressional Budget Office based on Department of 

Transportation, Bureau of Transportation Statistics, 

National Transportation Statistics 2005, Table 1-46a.

trillion ton-miles to about 1.6 trillion ton-miles (see 

Figure 2).27

Coal has long been the dominant commodity carried by 

rail in the United States. In 2004, it accounted for about 

43 percent of the tons carried (see Figure 3) and about 20 

percent of revenues of Class I railroads.28 Coal traffic has 

trended upward over the past 10 years (see Figure 4 on 

page 8).

The principal sources of railroad growth over the past decade have been coal and intermodal (“miscellaneous 

mixed”) shipments.29 Coal traffic (as measured in tons) 

rose about 37 percent from 1994 to 2003; in terms of 

revenue, however, it increased just 12 percent.30 Intermodal shipments, which tend to be relatively high in 

value and can command higher rates, grew about 33 percent in tonnage and 46 percent in revenues from 1994 to 

2003.31

Projections of Growth in Demand for Rail

Transportation

Rail traffic is projected to continue to increase as the 

economy grows. The Department of Energy’s Energy Information Administration (EIA) projects rail growth of 

1.7 percent annually, rising from about 1.6 trillion tonmiles in 2004 to nearly 2.4 trillion ton-miles in 2030.32

The Energy Department’s interest in rail transportation 

derives primarily from its interest in the production and 

consumption of coal. The EIA projects an increase in the 

number of tons of coal consumed in the United States of 

about 62 percent between 2004 and 2030.33 About 92 

percent of coal consumption in 2004 was for the production of electricity.34 The EIA projects Western coal production to increase to nearly 1.1 billion tons in 2030 

from 627 million tons in 2004.35 Most of that coal will 

have to be transported over distances for which trucking 

costs would be prohibitive and where water transportation is unavailable, so railroads will probably be called 

upon to fill the need for coal transportation.

The Federal Highway Administration (FHWA) has also 

developed a forecast of demand for freight transportation. 

That forecast, called the Freight Analysis Framework 

(FAF), focuses on tonnage, rather than ton-mileage, and 

27. Association of American Railroads, Class I Railroad Statistics 

(Washington, D.C.: AAR, July 13, 2005), available at 

www.aar.org. These numbers include Class II and III railroad 

data. The Bureau of Transportation Statistics numbers used to 

compare railroads with other modes include only Class I data.

28. Association of American Railroads, Class I Railroad Statistics, p. 3.

29. Intermodal service refers to truck trailers and containers transported on railcars. “Miscellaneous mixed” shipments include 

those carried by boxcars and other types of equipment in addition 

to containers and trailers used in intermodal transportation.

1965 1970 1975 1980 1985 1990 1995 2000

0

200

400

600

800

1,000

1,200

1,400

1,600

Class I Railroad

Intercity Truck

Water Carrier

30. Association of American Railroads, Railroad Ten-Year Trends, 

1994-2003 (Washington, D.C.: AAR, 2004), pp. 45 and 47.

31. Ibid.

32. Department of Energy, Energy Information Administration, 

Annual Energy Outlook 2006 (Early Release), Table 7, available at 

www.eia.doe.gov/oiaf/aeo/index.html.

33. Ibid., Table 15.

34. EIA projected a decline to 84 percent in 2030.

35. Department of Energy, Annual Energy Outlook 2006, Table 15. 

Western coal generally has lower sulfur content, which makes it 

more attractive under current environmental laws. However, policies or technologies could change—such as finding that Western 

coal might cause other environmental damage or finding new 

technologies to remove sulfur more cheaply—that would shift the 

balance away from Western coal. That would have major effects 

on the coal-hauling railroads.
6 FREIGHT RAIL TRANSPORTATION: LONG-TERM ISSUES

Figure 2.

Freight Carried by U.S. Railroads, 

1890 to 2003

(Billions of ton-miles)

Source: Congressional Budget Office based on Association of 

American Railroads, Railroad Facts, 2004 Edition, pp. 27 

and 32; and Association of American Railroads, Class I 

Railroad Statistics (July 13, 2005), available at 

www.aar.org.

is for the years 2010 and 2020.36 In the FAF forecast, 

freight tonnage in the United States (including imports 

and exports) will rise by nearly 70 percent between 1998 

and 2020, increasing from 15.3 billion tons in 1998 to 

25.8 billion tons in 2020.37 Rail tonnage is projected to 

rise by about 55 percent, from 2.3 billion tons to 3.6 billion tons.38 Rail’s share of all freight traffic is projected to 

decline from 15.1 percent in 1998 to 13.9 percent in 

2020.

In the FAF forecast for 2020, coal continues to dominate 

rail traffic, accounting for about 37 percent of tonnage 

(see Figure 5 on page 9). Trailing coal are chemicals, accounting for about 9 percent of rail tonnage; food and 

kindred products, with about 8 percent; and, with about 

7 percent each, farm products, nonmetallic minerals, and 

a category called “freight all kind,” which refers to general 

freight that might be carried in boxcars or intermodal 

containers or trailers.

Showing the greatest growth in rail tonnage between 

1998 and 2020 are clay/concrete/glass/stone and food 

and kindred products, which are projected to more than 

double in volume (see Table 1 on page 10). General 

freight (freight all kind) and lumber and wood are projected to nearly double. Coal and chemicals are projected 

to grow by 28.5 percent and 75.5 percent, respectively.

Meeting Future Freight Transportation Demand: 

The AASHTO Report

The transportation demand of a growing economy can be 

met in various ways. The FHWA’s Freight Analysis 

Framework projects that each mode will see an increase in 

the amount of traffic it carries. But both the inherent advantages of each mode and the public policies affecting 

them will have a bearing on the pattern of growth.

A recent report that has been influential in the debate 

over freight transportation policy is the Freight-Rail Bottom Line Report, published by the American Association 

of State Highway and Transportation Officials.39 That 

report was motivated by concerns that highway capacity 

was increasingly being stretched to its limits. State transportation planners were interested in whether future 

freight transportation demand could be met more efficiently through a mix of highway and rail investments 

rather than focusing on highways. The Bottom Line Report made alternative assumptions about how the freight 

railroad industry might respond to growing demand, and 

it analyzed the implications for highway and other infrastructure needs.

Using forecasts of freight transportation demand—principally proprietary forecasts of the Freight Analysis 

Framework—the Bottom Line Report estimated how 

much new highway capacity would be needed, and what 

36. American Association of State Highway and Transportation Officials, Freight-Rail Bottom Line Report, p. 50.

37. Federal Highway Administration, Freight Analysis Framework

(October 2002), FHWA-OP-03-006(R), available at 

www.ops.fhwa.dot.gov/freight/documents/faf_overview.pdf. 

Information about the methodology is available at www.ops. 

fhwa.dot.gov/freight/documents/WebMeth/faf_db_

derivation.pdf.

38. Rail’s domestic tonnage is projected to rise by about 48.1 percent, 

from roughly 1.9 billion tons to about 2.8 billion tons.

1890 1910 1930 1950 1970 1990 2003

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

All U.S. Railroads

Class I Railroads

39. American Association of State Highway and Transportation Officials, Bottom Line Report.
FREIGHT RAIL TRANSPORTATION: LONG-TERM ISSUES 7

Figure 3.

Composition of Class I Railroad

Traffic, 2004

(Share of tons carried)

Source: Congressional Budget Office based on Association of 

American Railroads, Class I Railroad Statistics (July 13, 

2005), available at www.aar.org.

it would cost, under each of four scenarios.40 It estimated the benefits of rail investment in terms of cost savings to governments for building and maintaining additional highway capacity, to highway users (by reducing 

vehicle operating costs, congestion, and accidents), and 

to shippers (by lowering transportation costs).

For its “base-case” scenario, which assumed that railroads 

would invest enough to maintain their current share of 

traffic in each of three submarkets (carloads, unit trains, 

and intermodal service), the Bottom Line Report estimated 

that the railroad industry would need to invest between 

$175 billion and $195 billion over a 20-year period.41

The report concluded, “Railroads should be able to provide the majority of the funding needed (up to $142 billion) from revenue and borrowing, but the remainder (up 

to $53 billion, or $2.65 billion annually) would have to 

come from other sources—including but not limited to 

loans, tax credits, sale of assets, and other forms of publicsector participation.”42 The report also estimated that its 

aggressive-investment scenario, which assumed that railroads would make substantial investments to improve 

and expand service, would require between $205 billion 

and $225 billion over 20 years.43

The Bottom Line Report’s cost and benefit estimates were 

intended more to be illustrative than to be quantitatively 

precise. The authors did not specify the timing of the 

costs and benefits and did not attempt to state net benefits in terms of present discounted value. Because the 

benefits are likely to come later in the time period than 

the costs, the estimates presented in the report are likely 

to overstate the net benefits. That is, in present-value 

terms, the net benefits would likely be less that the Bottom Line Report suggested. In that case, the capacity expansion needed to meet future demand might be less 

than the report indicates.

Rail traffic appears to be growing faster than the 

AASHTO report projected, underscoring the importance 

of addressing capacity issues but rendering the report 

more useful for its qualitative insights than for its quantitative estimates.

The Supply of Freight Rail

Transportation

Various indicators can shed light on an industry’s ability 

to provide and expand service. In the case of the railroad 

industry, however, some of those indicators do not lead to 

definitive conclusions. Both capital stock and employment in the industry have declined over the long run, giving rise to concerns about the railroads’ willingness and 

ability to invest in additional capacity. But productivity 

has increased dramatically, enabling railroads to provide 

service with significantly fewer resources than were previously needed.

Because railroad capital is long-lived, interpreting the 

data on trends in investment can be difficult. Adjusting 

to changes in demand, the competitive environment, and 

government policies can take a long time. For most of the 

20th century, federal regulation kept the railroad industry 

40. Ibid., p. 50.

41. Ibid., p. 4.

Coal

 (43%)

Chemicals

 (9%)

Farm

Products

 (8%)

Nonmetallic

Minerals

 (8%)

Mixed

Shipments

 (6%)

Food and

Kindred

Products

 (5%)

Other

 (21%)

42. Ibid.

43. Ibid.
8 FREIGHT RAIL TRANSPORTATION: LONG-TERM ISSUES

Figure 4.

Freight Transported by U.S. Railroads, 1994 to 2004

Sources: Association of American Railroads, Railroad Ten-Year Trends, 1994-2003, pp. 45 and 47; and Association of American Railroads, 

Class I Railroad Statistics (July 13, 2005), available at www.aar.org.

in the United States in a disequilibrium that was characterized by excess capacity. That was particularly true in 

the East and Midwest, where numerous competing railroads had sought to capture larger shares of the market by 

building ahead of demand.44 The overcapacity was exacerbated by regulatory controls that prevented railroads 

from shedding underused and unprofitable lines.

Once the Staggers Rail Act of 1980 eased regulation of 

abandonment and made withdrawing from unprofitable 

service easier, the major (Class I) railroads began to abandon lines or to transfer them to short-line railroads that 

could meet the needs of local markets more efficiently. In 

addition, mergers between railroads reduced redundant 

capacity. The number of miles of track owned by Class I 

railroads dropped from nearly 271,000 in 1980 to 

169,000 in 2003.45 The number has hovered around 

170,000 over the past few years, suggesting that most of 

the line-capacity adjustments made possible by the Staggers Act have occurred.

At the same time, the number of train-miles has grown, 

especially in recent years. That has led to a greater intensity of use of tracks (see Figure 6 on page 11). Such 

growth helps explain why some tracks are becoming increasingly congested, a factor that has contributed to concern about the railroads’ ability to meet future demand. 

As the number of trains per mile of track has increased, 

the average speed—a measure that experts often use as an 

indicator of railroads’ performance—has declined; it is 

now lower than it has been since the early 1980s, except 

for the turbulent 1997-1998 period following the merger 

of Union Pacific and Southern Pacific.

Some observers believe that the mid-1990s marked a 

turning point for the railroad industry. After disinvesting 

for years to rationalize their systems, railroads increas1994 1996 1998 2000 2002 2004

0

100

200

300

400

500

600

700

800

900

1994 1996 1998 2000 2002 2004

0

2

4

6

8

10

Coal Miscellaneous Mixed (Intermodal) Chemicals Farm Products

Revenues (Billions of dollars) Tons (Millions)

44. Transportation Research Board, Freight Capacity for the 21st Century, pp. 59-60. In the South, the degree of overcapacity was 

restrained by the destruction of tracks during the Civil War and 

the depressed state of the economy for decades following the war. 

In the West, the combination of later development of the economy and the cost of building track in remote locations that were 

subject to harsh conditions constrained investment in track. 45. Association of American Railroads, Railroad Facts, p. 45.
FREIGHT RAIL TRANSPORTATION: LONG-TERM ISSUES 9

Figure 5.

Distribution of Rail Traffic in 2020 as 

Projected by the Freight Analysis 

Framework

(Share of tons carried)

Source: Congressional Budget Office based on data from Federal 

Highway Administration, Freight Analysis Framework, 

available at www.ops.fhwa.dot.gov/freight/documents/

faf_overview.pdf.

ingly encountered situations where they could have sold 

more transportation services if they had had more capacity.46 Other observers think the turning point at which 

the railroads became able to sustain increases in rates 

across a wide range of traffic came more recently.47

Predicting trends is difficult, especially during a period of 

change. Recent activity suggests that the railroads will 

continue to expand capacity. Whether growth in supply 

will keep pace with growth in demand is an open question. This section presents data on trends in measures of 

inputs, costs, and productivity in the railroad industry. 

Railroad Costs

Railroads need a number of inputs to produce transportation services: right-of-way, tracks, locomotives, freight 

cars, labor, and fuel.48

Tracks and Equipment. Railroads are a capital-intensive 

industry: the ratio of capital to output is high relative to 

that of most other industries. That makes capital investment a key indicator of the industry’s ability to meet demand. As mentioned earlier, the number of miles of track 

has declined. 

The number of locomotives and freight cars in service is 

also an indicator of capital stock. Following a decline in 

the number of locomotives in the period from 1955 to 

1990, railroads began adding to their fleets (see Figure 7 

on page 12).49 The number of freight-carrying cars has 

followed the same general pattern. Over long periods of 

time, however, the number of locomotives and cars does 

not tell the full story of capacity because newer equipment can often handle much larger loads. The number of 

railcars owned by shippers and other nonrailroad companies has climbed steadily over the post-World War II period (except for a slight decline from 2002 to 2003).50

Real capital expenditures by Class I railroads have fluctuated over time. Real capital spending on roadways and 

structures has trended upward over the past decade, while 

real spending on equipment has been more volatile

(see Figure 8 on page 13). Spending on freight cars has always been cyclical.

Because rail investments are generally long-lived, shortterm fluctuations are less important than long-term 

trends as indicators of railroads’ plans and capabilities. Investment may rise and fall from year to year because of 

short-term factors such as interest rates or alternative investment opportunities.

46. Transportation Research Board, Freight Capacity for the 21st Century, p. 61, citing Daniel Machalaba, “Railroads’ Big Outlays on 

Infrastructure Are Questioned,” Wall Street Journal, April 30, 

1998, p. B4. 

47. See, for example, Statement of the Department of Transportation 

before the Surface Transportation Board in Ex Parte No. 658, the 

25th Anniversary of the Staggers Rail Act of 1980 (October 12, 

2005), available at www.stb.dot.gov.

Coal

 (37%)

Chemicals

 (9%) Food

 (8%)

Farm

 (7%)

Nonmetallic

Minerals

 (7%)

Freight

All Kind

 (6%)

Other

 (26%)

48. Railroads need land for rights-of-way, but a lack of land does not 

appear to have been a constraining factor. Where railroads currently have single tracks, they generally have a wide enough rightof-way to allow room for a second track. If necessary, they have 

access to the right of eminent domain to acquire land.

49. See Association of American Railroads, Railroad Facts, pp. 49 and 

51, for data on locomotives and freight cars, respectively.

50. Ibid., p. 51.
10 FREIGHT RAIL TRANSPORTATION: LONG-TERM ISSUES

Table 1.

Freight Rail Traffic, 1998 and 2020 (as Forecast by the Freight Analysis

Framework), by Major Commodity Group

(In order of growth rate)

Source: Congressional Budget Office based on projections from Federal Highway Administration, Freight Analysis Framework, available at 

www.ops.fhwa.dot.gov/freight/documents/faf_overview.pdf.

Labor. The number of workers employed in the railroad 

industry has dropped precipitously over the past half century, declining roughly 80 percent, from about 1.2 million in 1955 to 223,000 in 2003 (see Figure 9 on 

page 14).51 Yet, in 2004, the Class I freight railroads 

added about 3,000 workers to their payrolls.52 That upturn is expected to continue, at least in the short run.

In 2003, the total wage bill was about $9.6 billion, with 

average wages of nearly $62,000 per year, or $23.40 per 

hour.53 Labor costs, including benefits, amounted to 

about 36 percent of operating expenses in 2004.

Fuel. In 2003, the Class I railroads consumed more than 

3.8 billion gallons of diesel fuel, at a cost of about $3.4 

billion (about 89 cents per gallon).54 Fuel costs accounted for about 10.6 percent of operating expenses in 

2003. Fuel efficiency has been rising, from about 235 

ton-miles per gallon of diesel in 1980 to about 410 tonmiles per gallon in 2004.55 The Oak Ridge National Laboratory reports that railroads have better fuel efficiency 

than trucks or water carriers do, using 345 British thermal units (Btus) per ton-mile, compared with 3,476 for 

trucks and 471 for domestic waterborne commerce.56

Freight Rail

Traffic in 1998

(Millions of tons)

Freight Rail

Traffic Projected

for 2020

(Millions of tons)

Growth, 1998-2020

(Percent)

Growth, 1998-2020

(Millions of tons)

Clay/Concrete/Glass/Stone 53.2 121.8 128.9 68.6

Food and Kindred Products 103.5 228.1 120.3 124.6

Freight All Kind 96.4 187.3 94.3 90.9

Lumber/Wood 62.3 119.5 91.9 57.2

Waste/Scrap Materials 43.3 76.9 77.7 33.6

Chemicals/Allied 153.2 268.9 75.5 115.6

Pulp/Paper/Allied 46.7 79.1 69.3 32.4

Primary Metal 62.7 101.2 61.5 38.6

Transportation Equipment 45.5 63.7 40.1 18.3

Petroleum/Coal 45.4 63.3 39.4 17.9

Farm 153.9 208.4 35.4 54.5

Coal 829.6 1,065.7 28.5 236.1

Nonmetallic Minerals 151.1 192.9 27.7 41.8

Metallic Ores 76.0 57.0 -25.0 -19.0

51. Association of American Railroads, Railroad Facts, p. 56. These 

numbers include employees associated with passenger rail service. 

The number of employees of Class I railroads (including Amtrak, 

the passenger carrier) fell by about 84 percent during the 1955-

2000 period and by about 28 percent during the 1990-2003 

period.

52. Association of American Railroads, Class I Railroad Statistics, p. 1.

53. Association of American Railroads, Railroad Facts, p. 56.

54. Ibid., p. 61.

55. Association of American Railroads, “Economic Impact of U.S. 

Freight Railroads” (November 2005), p. 3, available at 

www.aar.org. 

56. Stacy C. Davis and Susan W. Diegel, Transportation Energy Data 

Book: Edition 24 (Oak Ridge, Tenn.: Oak Ridge National Laboratory, December 2004), p. 2-17, available at cta.ornl.gov/data/

Index.shtml.
FREIGHT RAIL TRANSPORTATION: LONG-TERM ISSUES 11

Figure 6.

Train-Miles per Track-Mile for Class I 

Railroads, 1978 to 2004

Source: Congressional Budget Office based on Surface Transportation Board, Statistics of Class I Freight Railroads in the 

United States (compilation of various years by Louis S. 

Thompson), available at www.stb.dot.gov.

Railroad Productivity

Historical data on railroads’ spending on capital and 

other inputs do not, by themselves, indicate whether the 

railroads’ ability to provide more transportation services is 

rising or declining. The railroad industry has experienced 

substantial improvements in productivity in recent years, 

which have enabled it to provide more service with 

smaller amounts of capital and fewer workers.

Railroad productivity growth outpaced that of the private 

business sector of the U.S. economy in the period from 

1958 to 1999 (see Figure 10 on page 15).57 Both multifactor productivity and labor productivity (the latter measured in output per hour of work) have grown sharply, especially in the post-1980 period when railroads could 

take advantage of reduced regulatory constraints following the Staggers Rail Act.

Railroads have made a number of technological advances 

that have spurred productivity growth. They have improved tracks by introducing concrete crossties and stronger steel. New freight cars generally can carry heavier 

loads than old ones can, and new types of equipment, 

such as cars designed to carry containers more compactly, 

have made intermodal service more efficient. Locomotives have become more powerful, more reliable, and 

more fuel-efficient. New signaling and sensing technologies have also contributed to productivity increases.

In addition, railroads have become more productive by 

changing the way they operate. They have encouraged 

shippers to aggregate their shipments so that, for example, they ship many carloads at the same time instead of 

just one or a few. That approach reduces the amount of 

railcar switching in freight yards, a process that can lead 

to delays, routing errors, and damage to shipments. Railroads have reduced car-switching delays and streamlined 

their operations by adopting a variety of operations-research techniques.

Financing Railroad Investment

As demand increases, the railroads’ ability to generate 

profits from which to finance new investments will be 

critical. Profits are key to increasing capacity because they 

provide both the incentives and the means to make new 

investments. Much of the railroad industry’s funding for 

investment comes from retained earnings.

As indicated in the previous section, railroads have cut 

costs and increased productivity substantially. The other 

major element in generating profits is the ability to sustain or raise prices. Raising rates presents the railroads 

with a dilemma: if they raise rates too much on certain 

commodities, they may risk reregulation of rates.

Prices

The prices (or rates) that railroads charge their customers 

feed directly into revenues, which affect profits and funding for new investment. The railroads’ pricing experience 

is not entirely clear; different sets of data seem to tell different stories about whether rates have been rising or falling. Price indexes generated by the Department of Labor’s Bureau of Labor Statistics (BLS) generally show 

railroad rates to be increasing, but the Surface Transportation Board, the Government Accountability Office 

(GAO), and others have done analyses that suggest declining rail rates over the long run.

57. Bureau of Labor Statistics, Office of Productivity and Technology, 

Historical Industry Multifactor Productivity Indexes, available at 

ftp://ftp.bls.gov/pub/special.requests/opt/dipts/indhimfp.txt 

(1958-1987) and ftp://ftp.bls.gov/pub/special.requests/opt/dipts/

indmfp.txt (1987-1999).

1978 1982 1986 1990 1994 1998 2002

0

500

1,000

1,500

2,000

2,500

3,000

3,500
12 FREIGHT RAIL TRANSPORTATION: LONG-TERM ISSUES

Figure 7.

Railroad Equipment in Service, 1955 to 2003

(Thousands)

Source: Association of American Railroads, Railroad Facts, 2004 Edition, pp. 49 and 51.

Producer Price Indexes. The BLS producer price index 

(PPI) for line-haul railroads indicates a steady rise from 

1969 to 2004 (see Figure 11 on page 16). That index 

generally tracks a commonly used benchmark, the PPI for 

finished goods. The “line-haul railroad” series includes 

passenger service, but that is a small fraction of the total. 

Beginning in December 1996, BLS published PPIs for 

the two major components of freight rail service, carloads 

and intermodal service (see Figure 12 on page 17 for 

those indexes and the finished-goods index). Both carload 

and intermodal prices trend upward in the BLS series.

Revenue Per Ton-Mile. Another way of assessing changes 

in railroad rates is to examine revenue per ton-mile, a 

measure that serves as a proxy for rates. Overall revenue 

per ton-mile has declined from about 2.9 cents in 1980 

to about 2.3 cents in 2003.58 That aggregate measure 

does not take into account changes in the composition of 

traffic, however. It could decline even if rates were rising 

if at the same time the mix of shipments was shifting toward higher percentages of those with lower rates. 

The Surface Transportation Board has created rail rate indexes based on revenue per ton-mile that take account of 

changes in the composition of traffic. The index shows a 

decline in rates, measured in revenue per ton-mile, over 

the period between 1984 and 1999, the most recent year 

available (see Figure 13 on page 18). When that index is 

adjusted for inflation using the GDP deflator, the decline 

is more pronounced (see the second panel of Figure 13 on 

page 18).

The STB has also calculated more-detailed indexes of 

rates by traffic type and by geographic location. It found 

that nominal rail rates in the East fell 13.2 percent between 1984 and 1999, and rates in the West fell 24.7 percent during that period.59 Adjusted for inflation, Eastern 

rates fell 40.7 percent, and Western rates fell 48.8 percent.60

As for individual commodities, the STB found that Western coal rates experienced an average annual inflationadjusted decline of 5.8 percent over the 1984-1999 

1955 1965 1975 1985 1995 2003

0

5

10

15

20

25

30

35

1955 1965 1975 1985 1995 2003

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Locomotives Freight Cars

58. Association of American Railroads, Railroad Facts, p. 30.

59. Surface Transportation Board, Rail Rates Continue Multi-Year 

Decline (December 2000), p. 5, available at www.stb.dot.gov.

60. Ibid.
FREIGHT RAIL TRANSPORTATION: LONG-TERM ISSUES 13

Figure 8.

Capital Expenditures of Class I

Railroads, 1990 to 2003

(Billions of 2000 dollars)

Source: Congressional Budget Office based on Association of 

American Railroads, Railroad Facts, 2004 Edition, p. 44.

period.61 Eastern coal rates, in real terms, dropped about 

3.9 percent annually over that period. Real rates for farm 

products in the West dropped 3.2 percent annually on 

average, while those in the East dropped 2.7 percent.

Inflation-adjusted rates on chemicals in the West fell

3.2 percent annually, while those in the East fell

3.5 percent.62

The STB index uses data on revenues and ton-mileage 

from its Carload Waybill Sample, which is drawn from 

bills of lading (with detailed data about individual shipments) submitted by the railroads. It eliminates bias associated with changes in the composition of rail traffic by 

weighting each commodity group’s rate change by its 

share of revenue.63

The Government Accountability Office has examined the 

STB’s Carload Waybill Sample and has generally agreed 

that rates on most rail traffic have been declining.64 Coal 

rates, as measured in real revenue per ton-mile, drifted 

lower in most markets between 1990 and 2000, although 

within that period, there were notable upticks in the

Central Appalachia-to-Orlando market and the Central 

Appalachia-to-Norfolk market.65 GAO found that real 

rates on grain trended gently downward during that period, although some wheat and corn markets experienced 

increases in some years.66 Rates on chemicals fluctuated 

but were lower in 2000 than in 1990 for most of the markets on which GAO reported.67

The STB’s and GAO’s analyses take more time to prepare 

than the BLS indexes. BLS publishes preliminary estimates soon after the end of each month. Those estimates 

are subject to revision, however, within a few months’ 

time, and sometimes the revisions are large. For example, 

preliminary numbers for fall 2004 indicated slight increases in rates on intermodal service, rising from an index number of 110.2 in September to 111.3 in October, 

112.0 in November, and 113.5 in December. Final numbers (as of January 2006) show rates in that period dropping from 110.2 in September to 104.1 in October and 

then rising gradually to 105.7 in November and 105.9 in 

December.

Transportation researchers have done additional work 

that supports the view that rail rates have been in a longterm decline.68 Aggregate measures indicating that out61. Ibid., p. 21. The STB found, for example, that railroads received 

$14.75 for hauling a ton of Western coal an average of 807 miles 

in 1984 but received only $10.11 for hauling a ton of Western 

coal 922 miles in 1999, with no adjustment for inflation. (Ibid., 

p. 7.)

62. Ibid., p. 21.

63. Ibid., p. 6.

1990 1992 1994 1996 1998 2000 2002

0

1

2

3

4

5

6

7

8

Total

Equipment

Roadways and Structures

64. GAO has statutory authority to view confidential business information in the sample that is ordinarily masked when the data are 

made available to the public. General Accounting Office (now 

known as the Government Accountability Office), Railroad Regulation: Changes in Freight Railroad Rates from 1997 through 2000, 

GAO-02-524 (June 2002) and Railroad Regulation: Changes in 

Railroad Rates and Service Quality Since 1990, GAO/RCED-99-

93 (April 1999).

65. General Accounting Office, Railroad Regulation: Changes in 

Freight Railroad Rates from 1997 through 2000, p. 13.

66. Ibid., pp. 15-20.

67. Ibid., pp. 39-40.

68. For example, see Scott M. Dennis, “Changes in Railroad Rates 

Since the Staggers Act,” Transportation Research, Part E, vol. 37 

(March 2001), pp. 55-69; and John Bitzan and others, The Differential Effects of Rail Rate Deregulation: U.S. Corn, Wheat, and Soybean Markets, prepared for the Agricultural Marketing Service, 

U.S. Department of Agriculture (June 2003). 
14 FREIGHT RAIL TRANSPORTATION: LONG-TERM ISSUES

Figure 9.

Railroad Employment, 1955 to 2003

(Thousands of workers)

Source: Congressional Budget Office based on Association of 

American Railroads, Railroad Facts, 2004 Edition, p. 56.

Note: Includes passenger rail and other railroad-related employment.

put has risen while revenues have remained relatively 

steady also support the conclusion that overall rates have 

fallen. It is unclear why the numbers from the BLS and 

STB seem to tell different stories (see Figure 14 on 

page 19 for a comparison of the BLS and STB indexes). 

The railroad industry has shifted some costs to shippers 

in several ways. By encouraging shippers to combine 

shipments into larger loads (for example, multiple carloads instead of single carloads), the railroads can cut 

their own costs, but doing so imposes greater costs on 

shippers, which must hold larger inventories as a result 

and may have to invest in facilities or equipment capable 

of handling larger shipments. In addition, more shippers 

are bearing the cost of investing in their own railcars.69

The STB estimates that added costs for shippers are 

small, however, when compared with the amount of 

money shippers have saved as a result of declines in rates 

(as reflected in revenue per ton-mile).70

Pricing Flexibility, Regulation, and Contracts. Rail rates 

are more flexible now than they were before passage of 

the Staggers Rail Act in 1980. Today, market conditions 

are stronger determinants of prices than regulation. If 

freight volumes rise relative to capacity, the pricing power 

of railroads should increase. For freight that could be 

handled by truck, the railroads’ primary concern would 

be losing business to truckers. For freight that has fewer 

alternative means of transportation, however, the railroads may decide to moderate rate increases so as not to 

risk reregulation. 

The Surface Transportation Board has authority to regulate rates on traffic for which certain conditions are met. 

Rates that are potentially subject to regulation are those 

that are available to shippers as part of railroads’

“common-carrier obligation.”71 Common-carrier rates 

are subject to maximum-rate regulation only where the 

STB finds the existence of market dominance by a railroad. To make a finding of market dominance, the STB 

must determine that there is no effective competition 

from other railroads or other modes of transportation for 

the traffic in question and that the revenues from that 

traffic are not less than 180 percent of the railroad’s variable cost of providing the service.72

Although individual contracts between railroads and 

shippers can be advantageous to both parties, they limit 

rate flexibility in the short run.73 Because the terms of 

contracts are not made public, it is not known what proportion of rail traffic is subject to contracts and the length 

of those contracts. GAO estimated that about 70 percent 

of rail traffic in 1997, measured in tons, moved under 

69. In 1980, about one-quarter of freight cars in service were owned 

by shippers and car companies; in 2003, more than half were.

1955 1965 1975 1985 1995 2003

0

200

400

600

800

1,000

1,200

1,400

All Railroads

Class I Railroads

70. Surface Transportation Board, Rail Rates Continue Multi-Year 

Decline, p. 4.

71. Common-carrier rates are available to all shippers on an equal 

basis. They contrast with contract rates, which result from agreements between a carrier and a shipper.

72. The Staggers Act encouraged the Interstate Commerce Commission (the STB’s predecessor) to exempt broad categories of rail 

traffic for which it determined that regulation was not necessary 

to protect shippers from the abuse of market power. The ICC 

exempted substantial amounts of rail traffic, such as all boxcar and 

intermodal shipments, that are competitive with trucks.

73. Contract rates are not subject to STB regulation, but the terms of 

contracts for certain agricultural commodities must be filed with 

the STB.
FREIGHT RAIL TRANSPORTATION: LONG-TERM ISSUES 15

Figure 10.

Productivity Growth, 1958 to 1999

(Index, 1958=100)

Source: Congressional Budget Office based on Bureau of Labor Statistics, Multifactor Productivity Series.

long-term contracts.74 The percentage of traffic under 

contract has probably declined since then as some coal 

and agricultural movements have shifted to common-carrier rates. The average length of contracts has also shortened, as railroads and shippers reportedly have been less 

willing to make commitments with long durations.75

In 2004, the railroads were able to raise rates for some 

traffic to adjust to changes in market conditions.76 That 

experience illustrates how the railroads have become freed 

from many of the rate-making constraints they once 

faced.

Profitability

The legacy of regulation has affected profitability in the 

railroad industry. When the Staggers Rail Act was passed 

in 1980, the railroads had excess track that was not yielding economic returns. Over the years, they have shed a 

number of low-volume spurs and focused on routes with 

more traffic and higher expected returns. Through costcutting and other measures, the railroad industry was able 

to improve net railway operating income in the late 

1990s and early 2000s; it fluctuated between $3.6 billion 

(1998) and $4.3 billion (1996).77

Still, the industry says that its investments are not generating enough of a return to meet the “regulatory cost of 

1958 1966 1974 1982 1990 1998

0

100

200

300

400

500

600

700

800

900

1000

1958 1966 1974 1982 1990 1998

0

100

200

300

400

500

Railroad Industry Private Sector

Multifactor Productivity Labor Productivity

74. General Accounting Office, Rail Regulation: Current Issues Associated with the Rate Relief Process, GAO/RCED-99-46 (February 

1999), pp. 3 and 16. Before the Staggers Act, contract rates were 

used infrequently because of uncertainties about their legal status.

75. Contracts for coal shipments negotiated in the first few years after 

the Staggers Act went into effect reportedly were for periods as 

long as 20 years, as electric utilities and railroads sought to lock in 

rates and service levels. In recent years, as both railroads and electric companies have been buffeted by regulatory and market 

changes, they have been more reluctant to enter into such lengthy 

contracts.

76. Congressional Budget Office, Freight Rail Transportation, A 

Review of the 2004 Experience, pp. 9-10.

77. Association of American Railroads, Railroad Facts, p. 17.
16 FREIGHT RAIL TRANSPORTATION: LONG-TERM ISSUES

Figure 11.

Producer Price Indexes, 1969 to 2004

(Index, 1982=100)

Source: Congressional Budget Office based on Bureau of Labor 

Statistics’ producer price indexes for line-haul railroads 

(including passenger service) and finished goods.

capital,” as estimated by the Surface Transportation 

Board.78 The STB annually estimates that measure, 

which is derived from the costs of debt and equity of the 

major railroads. The railroads’ rate of return on net

investment has consistently been below the regulatory 

cost of capital (see Figure 15 on page 20). According to 

the chairman of CSX, the railroads “are hindered as they 

compete with the Fortune 1000 for investment dollars

as they fail, year-in, year-out, to meet their cost of

capital.”79

The fact that railroads have been able to make some new 

investments in capacity indicates that those investments 

are valued highly enough to bring an adequate return. 

Older, less profitable investments may depress a railroad’s 

overall return on investment. That measure, therefore, 

does not fully indicate whether a new, promising investment can be financed.

Another measure of profitability is the rate of return on 

railroad shareholders’ equity, which has been roughly in 

the 8 percent to 9 percent range in recent years (but 

which declined to 6.65 percent in 2003). That return has 

generally fallen short of returns in manufacturing and a 

composite industry index. Over the past five years, however, the stock prices of the four largest railroads have 

outperformed the Standard and Poor’s 500 Index.

In summary, railroads have incentives to make investments that are likely to yield adequate returns—that is, 

returns that exceed the cost of capital. The present value 

of the benefits of an investment to a railroad must exceed 

the present value of its costs.80 One would expect railroads to have menus of possible projects and to choose 

the investments with the greatest returns first, then move 

down the priority list until the cost of capital no longer is 

covered by the investment return. It appears that railroads 

have been able to generate enough profits to finance some 

investments and attract new capital. The prospect of future profitability is an open question, however.

Factors That Might Affect Railroad 

Investment

Several factors could affect the railroad industry’s decisions about investing in infrastructure. The central thread 

tying them together is the proposition of a “non-level 

playing field,” that is, that the railroad industry faces 

higher costs or other obstacles that competing industries—truckers and water carriers—do not face. Railroads 

provide their own infrastructure, whereas their competitors do not. Furthermore, railroads are subject to several 

industry-specific laws. In addition to the vestiges of economic regulation that remain under the Interstate Commerce Act, the railroad industry has its own set of laws 

covering such matters as retirement, unemployment

insurance, job protection following mergers, the resolution of labor disputes, workers’ compensation, and

bankruptcy.

Ownership of Infrastructure

Railroads differ from other modes of transportation in 

the United States in that they own and maintain their 

own infrastructure—rights-of-way, tracks, signaling 

equipment, and so forth. In contrast, governments

78. Association of American Railroads, Railroad Profitability (August 

2004), available at www.aar.org.

79. Michael J. Ward, “CSX Transportation, Inc.—Fall Peak Planning,” letter to Roger Nober, Chairman, Surface Transportation 

Board, in response to Nober’s letter asking Class I railroads how 

they intended to meet fall peak demands (August 3, 2004), p. 2.

1969 1974 1979 1984 1989 1994 1999 2004

0

20

40

60

80

100

120

140

160

Finished Goods

Line-Haul Railroads

80. If there are benefits external to a railroad, it may not have the 

incentive to make the investment.
FREIGHT RAIL TRANSPORTATION: LONG-TERM ISSUES 17

Figure 12.

Producer Price Indexes, 1997 to 2004

(Index, 1997=100)

Source: Congressional Budget Office based on Bureau of Labor 

Statistics’ producer price indexes for rail carloads, rail 

intermodal service, and finished goods.

provide the infrastructure—highways and inland waterways, including locks and dams on rivers—for the railroads’ primary competitors. That institutional arrangement has implications for investment.

Railroads Pay the Full Cost of Their Infrastructure.

Current user-tax policies appear to tilt the playing field in 

favor of the trucking and water carrier industries. Although truckers and barge operators pay taxes that cover 

some of the costs of the infrastructure, they do not cover 

all of the costs incurred by governments. At the federal 

level, the Federal Highway Administration estimates that 

large trucks pay in taxes only about 50 percent to 80 percent of the costs attributed to them.81 Barge operators on 

the inland waterways pay taxes that cover only about 20 

percent of the amount the Corps of Engineers spends on 

navigation projects.82 In contrast, the railroads pay for 

their rights-of-way and infrastructure and often must pay 

local taxes on those investments as well. Those factors 

translate into lower private costs for truckers and water 

carriers and enable them to attract some freight shipments that could be carried at a lower total cost by the 

railroads. That encourages greater spending on highway 

and waterway construction than would be justified on 

economic grounds and leads to an inefficient use of the 

economy’s resources.

Railroads Bear Risks Associated with Infrastructure 

Ownership. Even if truckers and water carriers paid the 

full cost of their use of highways and waterways, they 

would not bear the risk of investing in highways or water 

projects in the wrong location. If a railroad lays track in 

anticipation of demand that ultimately does not materialize, the investment is sunk; it has little or no value. But if 

a state builds a highway in anticipation of demand that 

does not materialize, the state and its taxpayers bear the 

risk, not trucking companies. The immobility of capital 

makes it harder for the railroads to raise funds for investment.

Railroad-Specific Laws

For most of its history, the railroad industry in the United 

States has been governed by laws specific to that industry. 

Much of the difference in policy treatment derives from 

the railroad industry’s place in history. Railroads were the 

first major companies to operate across state lines, and 

that motivated the passage of federal laws intended either 

to protect railroads from discriminatory treatment by the 

states and localities in which they operated or to protect 

shippers, passengers, and workers from abuses of market 

power.

The Interstate Commerce Act, passed in 1887, created 

the first federal commission, the Interstate Commerce 

Commission (ICC), to oversee and regulate an entire industry. Over the next half century or so, additional federal laws were enacted that dealt specifically with railroad 

matters. The railroad industry was subject to its own retirement system, similar to but separate from Social Security; its own unemployment insurance system; its own 

system for compensating workers injured on the job; its 

own system for resolving labor disputes; special provisions to protect the jobs of workers following railroad 

mergers and abandonments; and special provisions in the 

bankruptcy code. Some of those laws may impose requirements on the industry that are more costly to meet 

than those of corresponding laws affecting most other industries, but the reverse could also be true. Assessing the 

81. Department of Transportation, Federal Highway Administration, 

Addendum to the 1997 Federal Highway Cost Allocation Study Final 

Report (May 2000), Table 7. 

82. The costs include both construction and operations and maintenance.

1997 1998 1999 2000 2001 2002 2003 2004

0

90

100

110

120

Carloads

Intermodal

Finished Goods
18 FREIGHT RAIL TRANSPORTATION: LONG-TERM ISSUES

Figure 13.

Rail Rate Index, Measured in Revenue per Ton-Mile, 1984 to 1999

(Index, 1984=100)

Source: Congressional Budget Office based on Surface Transportation Board, Rail Rates Continue Multi-Year Decline (December 2000),

p. 22.

effects of the laws is beyond the scope of this paper, but 

the descriptions provided below offer an indication of 

their scope and coverage.

Interstate Commerce Act. The Interstate Commerce Act 

and its amendments governed most business practices of 

the railroad industry for more than a century. Before 

building a rail line, starting or abandoning service, or 

merging or acquiring control of another company, a railroad had to obtain permission from the Interstate Commerce Commission. Moreover, the commission had (and 

used) the authority to suspend proposed rates before they 

became effective. The result was that the railroad industry 

could not respond quickly to changing economic conditions. As railroads lost business to the trucking industry 

and as regional traffic patterns changed, the railroads 

were left with considerable excess capacity. Only after the 

Staggers Rail Act of 1980 eased rules on abandonment 

were railroads able to shed large pieces of costly infrastructure—and that process of adjustment has taken 

many years.

Although the trucking industry also came under the jurisdiction of the Interstate Commerce Commission in 

1935, regulation did not have the same detrimental effects on that industry as it had on the railroad industry. 

Regulation was probably a net benefit to the trucking industry because it protected existing firms from competition.

Examples of regulatory restrictions on railroads’ ability to 

operate in as businesslike a manner as possible include the 

following:

B Before passage of the Staggers Act in 1980, there was 

ambiguity about the legality of contracts between railroads and shippers. That ambiguity made railroads reluctant to enter into long-term contracts that could 

have reduced risk and encouraged investment where 

future demand was ensured, thereby benefiting both 

railroads and shippers.

1984 1986 1988 1990 1992 1994 1996 1998

0

10

20

30

40

50

60

70

80

90

100

110

1984 1986 1988 1990 1992 1994 1996 1998

0

10

20

30

40

50

60

70

80

90

100

110

Eastern United States Western United States United States

In Nominal Terms Adjusted for Inflation
FREIGHT RAIL TRANSPORTATION: LONG-TERM ISSUES 19

Figure 14.

Comparison of BLS and STB Rail Price 

Indexes, 1984 to 1999

(Index, 1984=100)

Source: Congressional Budget Office based on Surface Transportation Board, Rail Rates Continue Multi-Year Decline

(December 2000), p. 22, and Bureau of Labor Statistics’ 

producer price index.

Note: The BLS index is the Bureau of Labor Statistics’ producer 

price index for line-haul railroads (including passenger service); the STB indexes are the Surface Transportation Board’s 

nominal rail rate index and the rail rate index adjusted for 

inflation using the gross domestic product deflator.

B Before passage of the ICC Termination Act of 1995, 

railroads were generally prohibited from owning 

trucking companies or water carriers (or vice versa), 

except in special circumstances.83 That essentially prevented railroads from being able to market themselves 

as one-stop-shopping transportation companies that 

could deliver shipments from origin to destination by 

whatever mode they deemed most economical.84

B The “commodities clause,” in effect from 1906 (with 

the enactment of the Hepburn Act) to 1995 (with the 

ICC Termination Act of 1995), prohibited railroads 

from hauling commodities they owned or produced. 

Although it was intended to prevent discrimination, it 

also precluded mergers that might have yielded greater 

efficiency.

The Railway Labor Act. Enacted in 1926, the Railway Labor Act (RLA) was based on the premise that the railroad 

industry was so important to the nation’s economy that 

work stoppages would be quite disruptive.85 It sets forth 

an explicit set of procedures that must be followed before 

railroad workers can go on strike. Rail labor contracts do 

not expire; instead, the railroads and unions agree to 

dates when contracts may be opened to new bargaining. 

Even so, labor stoppages can occur, although they are 

mitigated by the ability of the National Mediation Board 

to delay a strike for 30 days through mediation and to 

notify the President, who can appoint an emergency 

board and further delay a strike for an additional 90 days. 

The RLA permits secondary picketing—that is, picketing 

of companies that are not party to the dispute—which is 

illegal everywhere else (except in the airline industry, 

whose labor relations have been covered under the RLA 

since 1936). As a result, local disputes can have nationwide effects. The RLA predates other federal labor laws, 

such as the 1935 National Labor Relations Act.

The Federal Employers’ Liability Act. Enacted in 1908, at 

a time when railroads dominated the economic landscape 

and railroad work was considered particularly hazardous, 

the Federal Employers’ Liability Act (FELA) governs 

compensation for injuries suffered on the job in the railroad industry (including Amtrak and commuter railroads 

as well as freight railroads).86 In most other industries, 

workers are covered by state workers’ compensation systems, although federal employees are covered under the 

1984 1986 1988 1990 1992 1994 1996 1998

0

20

40

60

80

100

120

BLS

STB (Nominal)

STB (Adjusted for inflation)

83. The ICC Termination Act (ICCTA) is P.L. 104-88, 109 Stat. 803 

(1995). Pursuant to the provisions of former 49 U.S.C. 11344(c), 

which were repealed in the ICCTA, until 1982 the ICC typically 

authorized railroads to acquire motor carriers only if their operations were auxiliary to the railroad’s business. The ICC made 

exceptions under the “special circumstances” rule, but only if it 

found that the transaction would not restrain competition and 

that it would be in the public interest. The ICC generally found 

that the special-circumstances test was not met unless the to-beacquired motor carrier served routes not regularly served by other 

motor carriers. See American Trucking Ass’ns v. ICC, 722 F.2d 

1243, 1246-1247 (5th Cir. 1984). The provisions of former 49 

U.S.C. 11321 precluded railroads from owning water carriers that 

could compete with them, unless the ICC found that the water 

carrier could be operated in the public interest without diminishing competition. That provision was also repealed in the ICCTA.

84. D. Philip Locklin, Economics of Transportation, Seventh Edition 

(Homewood, Ill.: Richard D. Irwin, Inc., 1972), pp. 862-867.

85. The RLA is codified as amended at 45 U.S.C. 151-163.

86. FELA is codified as amended at 45 U.S.C. 51-60.
20 FREIGHT RAIL TRANSPORTATION: LONG-TERM ISSUES

Figure 15.

Cost of Capital and Return on

Investment, 1990 to 2003 

(Percent)

Source: Congressional Budget Office based on Association of 

American Railroads, Railroad Facts, 2004 Edition, pp.

18–19.

Federal Employees’ Compensation Act, and certain maritime industry workers are covered under the Longshore 

and Harbor Workers’ Compensation Act.87 Although 

FELA has been amended several times, it remains essentially the same as when it was enacted.

FELA takes liability into account, in contrast to most 

other workers’ compensation, which is no-fault. It employs the concept of comparative negligence, so that even 

if a worker was partially responsible for an injury, he or 

she can claim compensation for the portion of negligence 

attributed to the railroad. Under FELA, a worker can be 

compensated for lost earnings; under the other laws, replacement of earnings is limited.

The railroad industry believes that moving from FELA to 

the states’ workers’ compensation systems could benefit 

the industry substantially.

GAO has found that FELA may be more costly than 

standard workers’ compensation, depending largely on 

the relative number of workers who were permanently 

disabled by on-the-job injuries.88 If fewer than two-thirds 

of the workers who were eligible for workers’ compensation were permanently disabled, no-fault workers’ compensation would probably be less costly; if more than 

two-thirds were permanently disabled, FELA would be 

less costly. That results in part because the amount of 

FELA awards does not necessarily reflect the degree of 

disability, whereas under workers’ compensation, a 

worker who is able to return to work no longer receives 

workers’ compensation.

The Railroad Retirement Act. The Railroad Retirement 

Act, passed in 1934—a year before the Social Security 

Act—established the Railroad Retirement System, which 

has features similar to Social Security but includes only 

railroad workers in the system.89 The narrow base makes 

the railroads and their workers highly dependent on each 

other’s fortunes. As the number of railroad workers has 

dropped over many years, the problem of a decreasing 

number of workers paying into a system to support a 

large number of retirees has been even more pronounced 

than that for Social Security. 

Railroad Unemployment Insurance System. The Railroad 

Unemployment Insurance System was established in 

1938.90 It was created to address problems that unemployed railroad workers faced in obtaining benefits from 

state unemployment insurance programs because their 

work took them across state lines, thus making it unclear 

which jurisdiction was responsible for paying benefits. 

The railroad system is funded entirely by taxes imposed 

on the railroads; it is administered by the Railroad Retirement Board. The unemployment insurance account has 

authority to borrow from the railroad retirement account 

if needed to pay benefits. 

Labor Protection for Railroad Employees. The Interstate 

Commerce Act provides mandatory labor protection for 

87. Joe Richardson, The Federal Employers’ Liability Act (FELA): Background and Controversy, CRS Report for Congress 96-189 EPW 

(Congressional Research Service, updated January 2, 1997).

1990 1992 1994 1996 1998 2000 2002

0

2

4

6

8

10

12

14

Rate of Return on Net Investment

Regulatory Cost of Capital

88. General Accounting Office, Federal Employers’ Liability Act: Issues 

Associated With Changing How Railroad Work-Related Injuries Are 

Compensated, GAO/RCED-96-199 (August 1996).

89. The original legislation was held to be unconstitutional. The Railroad Retirement Act of 1935 is codified (as amended and revised) 

at 45 U.S.C. 231-231v.

90. Railroad Unemployment Insurance Act of 1938, codified as 

amended at 45 U.S.C. 351-369.
FREIGHT RAIL TRANSPORTATION: LONG-TERM ISSUES 21

railroad employees affected by certain STB-approved 

transactions. For example, employees receive up to six 

years of wage protection, as well as moving and retraining 

allowances, following certain types of mergers and abandonments.91

Railroad Bankruptcy Laws. Bankruptcy law treats railroads somewhat differently from most other businesses.92

The existence of railroad-specific provisions most likely 

would have very little effect on investors’ current willingness to invest in the Class I freight railroads because those 

railroads do not appear to be in danger of going bankrupt. Still, the laws constrain railroads’ options relative to 

those of their competitors and other industries.

In general, bankruptcy law is intended to provide as 

much repayment as possible to creditors while recognizing that the debtor cannot repay the full amount owed. 

Liquidating the assets of the debtor is one option. The 

other is to find a way to reorganize so as to preserve as 

much value as possible of the debtor’s business so that 

creditors will have more assets to share. Railroad bankruptcy law makes liquidation a measure of last resort, allowing it only if a reorganization plan has not been approved within five years of the bankruptcy filing.93 That 

restriction is in keeping with the tradition of providing 

for the public interest in railroad-specific legislation. Railroad bankruptcy law requires that the bankruptcy court 

and trustee consider the public interest in preserving the 

debtor’s rail service—in addition to the interests of creditors—when they make decisions regarding the debtor’s 

reorganization.94 According to one railroad historian, 

“Railroad bankruptcy law was written to favor reorganization over creditors’ rights, on the assumption the railroad was a public utility on which the public depended.”95

If a railroad bankruptcy were to occur, perhaps the most 

costly potential constraint would be in connection with 

labor provisions. A bankruptcy court would not be allowed to modify any collective bargaining agreements 

governing wages or working conditions except as provided by the Railway Labor Act.96 If a debtor railroad is 

merged into another railroad, the pay and benefits of the 

employees of the debtor railroad must be protected.97

Amtrak-Related Requirements. The freight railroads are 

required by law to allow Amtrak to use their tracks with 

priority treatment at favorable rates.98 Amtrak is required 

to pay only its marginal cost, but that has been interpreted as excluding the cost of delaying freight trains. 

When freight railroads had excess capacity, Amtrak imposed little in the way of congestion costs. Now, however, 

those costs may be substantial—to both Amtrak and the 

freight railroads—on certain routes at peak times.99 For 

example, competing demands of Amtrak and surging intermodal traffic on Union Pacific’s line between Los Angeles and El Paso have led to delays in both freight and 

passenger service.

Policy Options

The railroad industry appears to be adding to capacity in 

anticipation of long-term increases in demand for freight 

transportation. If experts conclude that the railroads are 

not investing as much or as rapidly as necessary to meet 

future demands, however, then policymakers might want 

to find ways of addressing some of the factors that were 

identified in the previous section as possible impediments 

to investment.

Policies Related to Ownership of Infrastructure

Railroads own and operate their infrastructure—a fact 

that affects them adversely when compared with their primary competitors, the trucking and water carrier industries. Because those industries do not bear the full cost of 91. More precisely, such labor protection applies to railroad abandonments other than entire system abandonments, mergers involving 

a large railroad and more than one medium-sized railroad, a line 

acquisition by a large railroad, and certain acquisitions by 

medium-sized or small railroads in which large or medium-sized 

railroads are involved.

92. Chapter 11, Subchapter IV, of the Bankruptcy Code, 11 U.S.C. 

1161-1174, deals with railroad bankruptcy.

93. Robin Jeweler, Railroad Reorganization under the U.S. Bankruptcy 

Code: Implications of a Filing by Amtrak, CRS Report for Congress 

RL31550 (Congressional Research Service, August 26, 2002),

p. 4, citing 11 U.S.C. 1174.

94. 11 U.S.C. 1165.

95. Richard Saunders Jr., Main Lines: Rebirth of the North American 

Railroads, 1970-2002 (DeKalb, Ill.: Northern Illinois University 

Press, 2003), p. 154.

96. 11 U.S.C. 1167.

97. 11 U.S.C. 1172(c)(1).

98. 49 U.S.C. 24308.

99. See Joseph Vranich, End of the Line: The Failure of Amtrak Reform 

and the Future of America’s Passenger Trains (Washington, D.C.: 

The AEI Press, 2004), p. 61.
22 FREIGHT RAIL TRANSPORTATION: LONG-TERM ISSUES

their use of highways and waterways, they enjoy a competitive advantage over the railroads. That imbalance can 

be addressed through policies that cause trucks and barge 

operators to cover their costs of using publicly provided 

infrastructure or through financial assistance to the railroad industry. The first type of policy is generally considered more likely to result in improved economic efficiency because it directly addresses the underlying causes 

of the disparity.

Impose Charges on Trucks and Barges to Cover Their 

Cost of Using Infrastructure. Changing the structure of 

user taxes and fees so that trucks and barge operators pay 

the costs associated with their use of highways and waterways would lead to a more efficient allocation of transportation resources, both within and across modes.100

When users of infrastructure (or any service) are not 

charged the cost of providing it, the result can be economic inefficiency—in this case, greater spending on 

highways and waterways than would be justified on economic grounds. Addressing the inefficiency might entail 

imposing charges based on trucks’ weights and the distance they are driven, with escalating rates as weight increased.101 The Transportation Research Board’s special 

report on freight transportation recommends that approach, advising that the structure of highway user taxes 

(which are primarily fuel taxes) be reformed “so that they 

more closely relate to costs each highway user imposes.”102

Provide Federal Financial Assistance. Another way of addressing the underpayment of infrastructure costs by railroads’ competitors is to provide financial assistance to the 

railroads. Such assistance could be given directly to railroad companies or to sponsors of rail projects (such as 

state or local governments or public/private partnerships). Providing federal aid for a rail investment might 

be economically justified if the net social benefits were 

large but the net private benefits to railroads were insufficient to induce them to make such an investment. The 

calculation of a benefit-cost ratio can be difficult and subject to distortion, however, if the full costs of other 

modes—not just the amounts paid in taxes—are not

included.

Railroads are currently eligible for federal loans and loan 

guarantees under the Railroad Rehabilitation and Improvement Financing (RRIF) program. Until now, few 

railroads have sought financing under the program because some of the conditions were considered onerous. 

Recently passed legislation removes some of those obstacles and expands funding authorization for the program 

tenfold, providing for up to $35 billion in loans and loan 

guarantees to be outstanding at any given time.103

Some railroad projects may have benefits to the public 

that are large in comparison to the prospective private 

benefits to railroads. In those cases, if the railroads cannot 

capture the public benefits, they may decide not to undertake the projects because they weigh their costs against 

only their private benefits. If public benefits were included in the calculation, and if public plus private benefits exceeded the costs, then it might be appropriate for 

governments to provide financial assistance for the 

projects. A rationale for governmental (though not necessarily federal) assistance for such a project is the existence 

of external benefits or costs, such as congestion or air pollution, that the project could address.104

In the past, the federal government has provided assistance for specific projects, such as the Alameda Corridor 

in southern California. That project was aimed at alleviating congestion caused by railroads and truckers serving 

the ports of Los Angeles and Long Beach. The federal 

government guaranteed a loan of $400 million, which 

has been repaid, for the $2.4 billion project. Another 

large intermodal project that is under way is the Chicago 

Region Environmental and Transportation Efficiency 

Project (CREATE), a $1.5 billion effort to eliminate rail 

bottlenecks and to reduce truck traffic that carries freight 

100. See Congressional Budget Office, Paying for Highways, Airways, 

and Waterways: How Can Users Be Charged? (May 1992).

101. Damage to highway pavement is an exponentially increasing 

function of vehicles’ weight per axle.

102. Transportation Research Board, Freight Capacity for the 21st 

Century, p. 8.

103. As originally authorized in section 7203 of the Transportation 

Equity Act of the 21st Century, 45 U.S.C. 822(d), the RRIF 

program provided for obligations up to $3.5 billion, with up to 

$1 billion set aside for short-line railroads. In August 2005, the 

amounts were expanded tenfold in section 9003(d) of the Safe, 

Accountable, Flexible, Efficient Transportation Equity Act: A 

Legacy for Users (SAFETEA-LU), P.L. 109-59, 119 Stat. 1144, 

1922 (2005).

104. A more direct approach, however, would be to reflect the costs 

of congestion and pollution in charges imposed on vehicles of all 

modes. 
FREIGHT RAIL TRANSPORTATION: LONG-TERM ISSUES 23

between rail lines. That project had not received federal 

funding prior to passage of highway and transit reauthorization legislation in August 2005, when it was given 

$100 million over five years.105

The TRB special report on freight capacity urged caution 

about providing government assistance. It encouraged 

careful benefit-cost analysis of alternative ways of transporting freight and alternative financing arrangements, as 

well as a demonstration “that public benefits exist that 

raise the public rate of return above the private rate.”106

It also noted that “An alternative policy to rail grants 

would be to adjust truck taxes to ensure that trucks covered their costs. Shippers would then select the best transportation options on the basis of true costs.”107

Policies Related to Railroad-Specific Laws

The panoply of railroad-specific laws that were summarized in the previous section imposes requirements that 

affect the railroad industry differently from its competitors and other industries in the United States. Examining 

the laws’ effects—in particular, whether they impose 

greater costs on the railroad industry—could suggest 

whether revising them could lead to greater productivity 

for railroads and a more efficient allocation of resources 

for the nation’s economy. (Such an examination is beyond 

the scope of this paper.)

The railroad-specific laws may have had greater justification when that industry dominated the economy. As the 

industry has fallen from a central role, however, those industry-specific policies may no longer serve their intended purposes and may cause transportation resources 

to be allocated inefficiently, to the detriment of the U.S. 

economy.

105. Section 1301(m) of SAFETEA-LU, P.L. 109-59, 119 Stat. 

1144, 1198 (2005).

106. Transportation Research Board, Freight Capacity for the 21st 

Century, pp. 11 and 135.

107. Ibid., pp. 43-44.