Short-line stakeholders seek to modernize 45G tax credit
10/4/2024
By Jeff Stagl, Managing Editor
After the Short Line Maintenance Tax Credit was enacted in 2005, short-line industry stakeholders lobbied hard from time to time for extensions so the short-term provision wouldn’t expire.
In December 2020, the tax credit became permanent through the federal Consolidated Appropriations Act and measures to extend it no longer were necessary.
Fast forward more than three years, and short-line industry constituents now are pushing to modernize the tax credit provision to better suit regionals’ and short lines’ needs.
Enter the Short Line Railroad Tax Credit Modernization Act (H.R. 9522/S. 5008). U.S. Sens. Ron Wyden (D-Wash.) and Mike Crapo (R-Idaho), and U.S. Reps. Earl Blumenauer (D-Wash.) and Mike Kelly (R-Pa.) introduced the bills in the House and Senate on Sept. 10.
More commonly known as Section 45G of the Internal Revenue Service code — 45G, for short — the provision allows a tax credit of 40 cents for each dollar short lines and regionals spend on track upgrades, bridge improvements or technology deployments, capped at $3,500 per mile.
The legislation would increase the cap from $3,500 per mile to $6,100 per mile and qualify more trackwork for the tax credit. Under current law, eligibility is based on track that was owned or leased by regionals and short lines as of Jan. 1, 2015; the bill would expand eligibility to all track owned or leased as of Jan. 1, 2024.
R. J. Corman owns 19 short lines that operate over 1,300 miles of track in 11 states. The tax credit helps fund such trackwork as tie replacements. R. J. Corman Railroad GroupIn addition, expenditures on all short line-owned track would become eligible and the tax credit would be indexed to inflation so small railroads’ future investments can keep up with labor and material cost increases.
Although short lines have made progress with infrastructure improvements, there is a backlog of work costing more than $12 billion that has yet to be completed, according to the American Short Line and Regional Railroad Association (ASLRRA).
The more than 600 regionals and short lines in the United States control 29% of the nation’s freight-rail system and serve more than 10,000 customers, yet generate only 5% of the rail industry’s annual revenue.
H.R. 9522 and S. 5008 would enable small railroads to continue providing safe and efficient service and generate a return on taxpayers’ investment, the bills’ sponsors say.
“Short-line rail is critical for rural and small communities. Modernizing the [tax credit] will help to invest in this critical infrastructure that extends opportunity to the furthest reaches of our communities," said Blumenauer in a press release.
The tax credit has prompted more than $8 billion worth of infrastructure investments by short lines since 2005. In addition, Federal Railroad Administration data shows that since 45G’s inception, train derailments on short lines have declined 50%, linking bolstered infrastructure to improved safety, according to the ASLRRA.
LA&L — which operates four short lines in portions of New York, Pennsylvania and Ontario — factors in 45G each year when planning general track maintenance work. Livonia, Avon & Lakeville Corp.But outdated caps and limitations are threatening to erode the tax credit’s potency, association leaders stress. The proposed tax credit updates will serve the short-line industry and its constituents for years to come, says ASLRRA President Chuck Baker.
“The 45G tax credit has been a powerful incentive for short lines to put more of their own funds to work upgrading track and bridges to modern standards, a benefit for the entire interconnected freight-rail network, thousands of rail shippers in critical industries and the American public,” he says.
On Sept. 19, 23 members of ASLRRA’s Legislative Policy Committee descended on Washington, D.C., to meet with representatives from 80 legislators’ offices and encourage the lawmakers to cosponsor H.R. 9522 and S. 5008. ASLRRA leaders plan to continue pushing for cosponsors throughout the rest of the 118th Congress in preparation for the reintroduction of the bills in the next Congress in 2025.
Leaders at Watco — which owns 46 regionals and short lines — would welcome the changes to 45G. The holding company has taken advantage of the tax credit every year since it was enacted.
Watco uses the tax credit in an aggregated manner rather than for specific infrastructure improvement projects. Currently, 42 of the company’s short lines are eligible for 45G, covering 6,435 miles.
“It helps us cover our maintenance-of-way needs and support our maintenance capital,” says Watco Senior Vice President and Chief Sustainability Officer Laura McNichol. “We have short lines that have seen considerable growth and 45G has helped considerably in keeping them open, in safe operating condition and driving efficiency for our customers.”
Some of Watco’s short lines still use track that can’t safely handle industry-standard 286,000-pound rail cars, so customers need to light-load their cars, she says.
“We use the credit to keep this track in service and try to leverage grant dollars where available to make big transformational changes to these lines,” says McNichol.
The tax credit still works as originally intended, but inflation is eroding its impact. For example, since 2019, the price of 115-pound steel rail has jumped from $975 per ton to $1,800 per ton and the cost of a tie has increased from $63 to $70, says McNichol.
Although federal grant programs — such as the Consolidated Rail Infrastructure and Safety Improvements, or CRISI, program — can help fund short-line infrastructure improvements, applications for those grants are complicated and the entire program process can be cumbersome. So, those grants aren’t a viable option for many short lines, says McNichol.
“45G unites the whole short-line industry. All 660 short lines can get the tax credit,” she says.
Livonia, Avon & Lakeville Corp. (LA&L) aims to take advantage of 45G every year, too. The company — which in addition to LA&L operates B&H Rail Corp., Ontario Midland Railroad Corp. and Western New York & Pennsylvania Railroad in portions of New York, Pennsylvania and Ontario — factors in the tax credit when planning general track maintenance for a given year.
“What 45G does is allow us to spend 40% more on our railroads,” says LA&L President and CEO Bob Babcock. “We try to max out the tax credit. With things you’re behind on or things that are out of the norm, it puts you over the top.”
Although general maintenance focuses on rail and tie work, projects involving culverts and bridges can be aided by 45G, he says, adding that bridge projects can be very expensive.
Some short lines such as the Ontario Midland — which LA&L acquired several years ago — are more dependent on the tax credit than others to keep up with needed track maintenance, says Babcock. The proposed changes to 45G figure to help extend the tax credit’s benefits.
“We are thankful for 45G. But the $3,500 per mile doesn’t go as far as it used to,” says Babcock. “Things have gotten very expensive, including rail, ties and other materials.”
