Senators focused on increasing rail capacity expansion through an investment tax credit

Legislation introduced last week by Senators Kent Conrad (D-N.D.) and John Ensign (R-Nev.) is focused on putting more investment towards improving and increasing railroad infrastructure and capacity.

The objective of the bill, entitled the Freight Rail Infrastructure Capacity Expansion Act of 2010, is to encourage private capital investments that can benefit the general public through expanded rail network capacity. This is a companion bill to one introduced in 2009 by Congressman Kendrick Meek (D-Fla.).

Legislation designed to expand rail network capacity is not new, as it has been introduced several times in past years. But the case for expansion is not to be easily overlooked, given the number of reports put out that cite a true need for expanding capacity to meet future needs, including:
-a 2006 report from the American Association of State Highway and Transportation Officials (AASHTO) that said by 2020 the rail system will carry an additional 888 million tons, for a 44 percent increase;
-a 2010 AASHTO report that said U.S. rail traffic will increase by 38 percent in 2040;
-a 2008 estimate by the Department of Transportation that demand for rail freight transportation measured in tonnage will increase 80 percent by 2035; and
-a projected $39 billion shortfall in required investment between 2007 and 2035 for Class I railroads to maintain current infrastructure efforts, according to the landmark 2008 National Rail Freight Infrastructure Capacity and Investment Study, which was commissioned by the DOT’s Railroad Energy Transportation Advisory CommitteeRailroad Committee and conducted by Cambridge Systematics.

Included in this bill are two tax incentives for increased private investment to expand freight rail infrastructure capacity. One being a 25 percent tax credit for capacity expansion expenditures on new freight infrastructure, and the other is the ability to expense all qualifying rail infrastructure capital expenditures that would spur the availability of capital necessary to expand capacity.

Previous versions of this legislation have indicated that the Freight Rail Infrastructure Capacity Expansion Act would provide a 25 percent tax credit for businesses that make investments in new rail infrastructure. The tax credit would be available to any shipper or carrier that makes a “qualified” expenditure. Examples of qualifying expenditures for the bill include track, grading, tunnels, signals, certain locomotives, bridges, yards, terminals, and intermodal transfer and transload facilities.

While there is clearly a need for augmenting the ability to fund railroad infrastructure capacity expansion, the railroad industry is also financially responsible for the installation and implementation of the $15 billion Positive Train Control (PTC) mandate, as per the Railroad Safety and Improvement Act of 2008. So, the along with the projected $39 billion shortfall, coupled with the $15 billion for PTC, could lead to a $54 billion gap.

“If you are pressing your Congressman over a concerns about there not being enough money for rail capacity and expansion and PTC and think we should legislatively encourage [Congress] to raise rates, I don’t think that is happening,” said Brooks Bentz, a partner in Accenture’s supply chain practice. It is the opposite. People think rails have monopoly power. I think there may be downward pressure on rates whether it is negotiated or legislated so you have these countervailing forces that are going to impact industry’s need for capacity expansion.”

Bentz added that the White House is also clamoring for increased high speed rail, which requires more capacity expansion to accommodate freight and passenger business, which puts per dollar pressure on rates and a shortfall that can only be funded by public-private investments or private revenue generation. Bentz also noted that one of the appealing measures of the bill is that it provides the potential funding for capacity expansion from private investment as opposed to turning to government coffers.

A Midwestern rail shipper, whom declined to be identified, told LM, that from a short-term perspective, a rail investment tax credit may not generate much in the way of capital spending.

“Nothing I have seen so far provides enough detail on the structure attached to the application of the tax credit that absolutely guarantees it will be spent on capacity expansion and what the definition of that will be versus getting a 25 percent tax credit and [railroads] applying tax credit dollars to a stock buyback to the rails or whatever,” said the shipper. “I am always leery of these credits bc they are not always used for the purposes they are created for.”

As an example, the shipper said that if railroads get a 25 percent tax credit, none of that is passed on to customers. He said if a Class I rail carrier wants to spend $2.5 billion on capital expenditures in 2011, it will build $2.5 billion into pricing structure, rather than $2.5 billion minus a 25 percent tax credit.

“From our perspective we will get improved service depending on where capex is spent,” said the shipper. “And because it won’t necessarily be spent evenly across their network and some benefits could come from expanding facilities and making them more efficient and things of that nature to increase the amount of track capacity one may have within a plant structure so rail cards don’t have to be stored on railroad property and reduce capacity in rail yards which allows more capacity to flow through it.”

Officials at the Association of American Railroads lauded the legislation. AAR President and CEO said in a statement it offers incentives for the country’s highly capital-intensive business and ensures freight rail can continue to meet these expectations.