JUL-AUG 2018

Crossties is published for users and producers of treated wood crossties.

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CONTACT RTA WEBSITE BECOME A MEMBER BECOME A MEMBER RTA WEBSITE CONTACT Cahaba Pressure Treated Forest Products Eagle Metal Products East Coast Railroad Gross & Janes Co. Hurdle Machine Works Koppers Inc. CROSSTIES • JULY/AUGUST 2018 8 value added. Including the indirect effects resulting from suppliers to the industry and induced effects resulting from expenditures of labor income, the industry supported 61,070 jobs in 2016. Operational spending by the industry supported 33,730 indirect and induced jobs in 2016, while capital spending by the industry of $755 million supported 10,240 jobs. This indicates that each job in the short line industry supports an average of 2.6 additional indirect and induced jobs across the rest of the economy (combined jobs to direct jobs multiplier of 3.6). Combined labor income amounted to $3.8 billion (labor income multiplier of 3.3), and value added amounted to $6.5 billion (value added multiplier of 2.9). The Section 45G Tax Credit Since its enactment in 2004, the railroad track maintenance tax credit (Internal Revenue Code section 45G) has provided an important financial incentive to maintain and improve short line infrastructure. The result has been a marked increase in industry investment, as evidenced by industry purchases of railway ties, which have grown at an annual rate of 6.3 percent since enactment of the credit, compared to 0.1 percent before the credit (see Figure E-1). In addition, safety on short line railroads has improved since enactment of the credit. For example, train derailments on short line railroads have declined by 50 percent, from a rate of 4.72 per million train miles in 2004 to 2.37 in 2017 (see Figure E-2). Standard cost of capital analysis indicates the section 45G credit provides strong incentives to invest in short line infrastructure. 2 For instance, for a corporate taxpayer making a break-even, or marginal, investment in short line track maintenance that is below the section 45G per mile cap, relative to current law in which the section 45G credit is expired, extending the section 45G credit reduces the user cost of capital by 63 percent. Empirical estimates of the responsiveness of investment to changes in the user cost of capital indicate that such a reduction in the user cost of capital is associated with a 47.3 percent increase in investment (see Table E-2). 3 Commentary "The report definitively shows what the industry has long known. Short lines are a critical piece of the U.S. transportation net- work and, in fact, the entire U.S. economy," said Judy Petry, chair of ASLRRA and pres- ident and CEO of Farmrail Inc. "Moreover, the report clearly shows the tremendous and far reaching impact on our ability to provide value to our customers and the economy of the 45G short line tax credit. Our very future hangs in the balance as the credit expired in December 2017. The time is now to make the Short Line Tax Credit permanent." "The Short Line Tax Credit is shown to be smart public policy, improving safety and efficiency for our customers and our busi- nesses. It is a proven solution, and we urge Congress to take action now to extend the Short Line Tax Credit. It will allow smaller railroads to continue to improve their safety performance, better serve their customers, and remain a catalyst for economic growth in areas of the country that would other- wise not have connectivity to the national rail network," said Jerry Vest, chairman of ASLRRA's Legislative Policy Committee and senior vice president, Government & Industry Affairs for Genesee & Wyoming Railroad Services Inc. NOTES: 1 American Short Line and Regional Railroad Association (ASLRRA), "Short Line and Regional Railroad Facts and Figures," 2017; Association of American Railroads (AAR) to ASLRRA, February 17, 2017, 2015 Short Line Railroad Industry Estimates. 2 The user cost of capital is the real before-tax rate of return that a marginal (i.e., break-even) investment must earn to recover the cost of investment, pay taxes on business income, and pay an expected after- Table E-2. Impact of Section 45G Tax Credit and the Tax Cuts and Jobs Act (TCJA) on Cost of Capital and Investment for a Short Line Infrastructure Project Tax Change Change in Cost of Capital Change in Investment Section 45G Tax Credit -63.0% 47.3% TCJA (reduced corporate tax rate and expensing) -1.2% 0.9% gu ay 0.2% 1.4% 0.1% 6.3% 0% 1% 2% 3% 4% 5% 6% 7% Before Section 45G (1988-2004) After Section 45G (2004-2016) Annual Growth Rate of Railway Tie Purchases Class I Railroads Short Line Railroads Figure E-1: Railway Tie Purchases Have Increased Since Enactment Of Section 45G Source: Railway Tie Association 4.72 2.37 3.23 1.73 0.0 1.0 2.0 3.0 4.0 5.0 6.0 Train Derailments Per Million Train-Miles First year of sec. 45G credit (2005) Short Line Railroads Class I Railroads Figure E-2: Safety On Short Lines Has Improved Since Enactment Of Section 45G Source: Federal Railroad Administration. Note: Class I data exclude Amtrak XXX ASLRRA REPORT

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