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Congressional Testimony
July 25, 2000, Tuesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 3827 words
COMMITTEE:
HOUSE WAYS AND MEANS
SUBCOMMITTEE:
OVERSIGHT
HEADLINE: TESTIMONY TAX TREATMENT OF
TRANSPORTATION INFRASTRUCTURE
TESTIMONY-BY: BERNARD R.
GUTSCHEWSKI , VICE PRESIDENT
AFFILIATION: TAXES OF
UNION PACIFIC CORPORATION
BODY:
JULY 25, 2000
TESTIMONY OF BERNARD R. GUTSCHEWSKI VICE PRESIDENT - TAXES UNION PACIFIC
CORPORATION ON BEHALF OF THE ASSOCIATION OF AMERICAN RAILROADS Good afternoon,
Mr. Chairman and members of the subcommittee, my name is Bernard R. Gutschewski,
and I am Vice President - Taxes of Union Pacific Corporation. I am testifying as
a representative for the Association of American Railroads (AAR). The AAR is a
trade association representing major freight and passenger
railroads.' The AAR appreciates the opportunity to present its members views
regarding key tax issues impacting the railroad industry. After providing you
background information about the railroads, I will use this opportunity to
address how the tax laws impose major burdens on our industry and place us at an
unfair disadvantage compared to our chief competitors and other modes of
transportation. This competitive disadvantage arises under federal excise,
income, and employment tax laws, as well as under state and local tax laws.
Should Congress create a level playing field, individual railroad companies
would be better able to make the much-needed capital investments in their
infrastructure, which clearly advances the public's desire and need for a
growing railroad industry. Railroads Play a Vital Role in Today's Economy
Freight railroads move just about everything -- from lumber to vegetables, from
coal to orange juice, from grain to automobiles, from chemicals to scrap iron --
and connect businesses with each other across the country and with markets
overseas. They carry 40 percent of the nation's inter-city freight -- more than
trucks, barges, pipelines, airplanes or automobiles; 70 percent of vehicles from
domestic manufacturers; 64 percent of the nation's coal; and 40 percent of the
nation's grain. In 1999, railroads hauled 18 million carloads of freight, plus
over 9 million trailers and containers, nearly tripling the intermodal volume of
1980. The U.S. freight railroads directly contribute $13 billion a year to the
U.S. economy in wages and benefits to more than 200,000 employees; U.S. rail
employees are among the very best compensated and most productive in all of U.S.
industry. Beyond this, railroads spend several billion dollars every year to
purchase materials, equipment and services. The railroad industry pays
significant taxes. In 1999 alone, Class I railroads2paid $3 billion in taxes in
addition to federal income taxes: $2.1 billion in federal payroll taxes $453
million in property taxes on their privately-owned right-of- way; $164 million
in federal fuel taxeS3 ; and $260 million in other taxeS.4 All of these facts
are evidence of how integral the railroads are to the continued vitality of the
U.S. economy. The ability of the U.S. railroads to continue to provide the
transportation services that the country needs has been, in large part,
dependent upon the nature of regulation to which it is subject. I will not
belabor the history of how pervasive and intrusive economic regulation almost
destroyed the private sector U.S. freight rail industry prior to 1980. The
troubles of the rail industry at that time, when railroads owning almost one-
quarter of the nation's rail trackage were in bankruptcy and many others were
teetering on the edge, are well documented. The freight railroads overall have
become much sounder financially in the nearly 20 years since enactment of the
Staggers Rail Act of 1980, which provided much-needed regulatory reform.
Moreover, deregulation has benefited railroad customers as well. On average it
costs 28 percent less to move freight by rail now than it did in 1981 and 57
percent less in inflation-adjusted dollars. In order to continue to satisfy the
country's demands for safe and efficient railroad transportation, the industry
must find the capital funds needed to make critical infrastructure improvements.
Funding of these infrastructure improvements while operating on an uneven
playing field is among the most critical challenges now facing the industry. The
Deficit Reduction Tax Imposed on the Railroads Creates Competitive Inequities
The most immediate tax inequity facing our industry is the discriminatory
deficit reduction fuel tax that continues to be imposed on railroads. AAR urges
Congress to promptly repeal this tax that adds to other tax burdens already
imposed on the railroads -- burdens that extend well beyond those imposed on our
chief competitors. The transportation industry was singled out to pay this
deficit reduction tax because it is based on fuel consumption. Moreover, within
the transportation industry, today only railroad and barge companies continue to
pay such a tax. The deficit reduction fuel tax rate has varied over time, and
currently stands at 4.3 cents per gallon on diesel fuel consumed. Since
inception of the tax in 1990, freight railroads have paid nearly $1.6 billion in
deficit reduction fuel taxes. The inequities of the current tax structure affect
railroads directly, but also unnecessarily burden our customers and hamper their
international competitiveness. The deficit reduction fuel tax places the
railroad industry at a significant economic disadvantage compared to its chief
competitor, the trucking industry. More than two years ago, Congress determined
that all revenues from fuel taxes paid by the truckers should be directed into
the Highway Trust Fund to be used for improvements and maintenance of highway
infrastructure - - a direct benefit to the trucking industry. Therefore, while
railroads continue to contribute to the financing of a non- existent deficit,
the truckers are merely funding their own infrastructure improvement. Even
though trucking companies pay various federal and state fuel and other taxes
that are dedicated to highway construction and maintenance, heavy trucks on
average pay less than two-thirds of the cost of the damage they cause to the
national highway system. In effect, a substantial portion of the cost of
building and maintaining the trucking industry's infrastructure is subsidized
through fuel taxes paid by general public highway users. By contrast, none of
the deficit reduction fuel tax paid by railroads is used for rail
infrastructure; instead, the railroad industry builds and maintains its own
private transportation network. In 1999 alone, freight railroads spent $7.7
billion maintaining and improving their own infrastructure. Other taxes, like
the $453 million of annual property taxes paid by railroads on their privately
owned right-of-ways, and sales taxes paid on infrastructure materials, are not
paid by trucking companies and further magnify the disparate infrastructure cost
comparison. The chart below illustrates the inequity of the current tax
structure: Found on hard copy only Congress has recognized the inequity of the
current tax structure, and the elimination of the unfair fuel tax imposed on
railroads and barges is widely supported. The Taxpayer Refund and Relief Act of
1999, passed by Congress on August 5, 1999, acknowledged the current inequity
and included repeal of this tax. (The Act was vetoed for reasons other than the
repeal of the fuel tax.) Moreover, other entities have supported the railroads'
efforts to seek the repeal of the unfair tax. The U.S. Chamber of Commerce and
the American Road and Transportation Builders Association have adopted policies
in support of repealing the 4.3- cent deficit reduction fuel tax. Numerous
agriculture groups, including the American Farm Bureau Federation, American
Soybean Association, National Association of Wheat Growers, and the National
Corn Growers Association, are also on record supporting the repeal of this tax.
Other Tax Laws Also Burden The Railroad Industry Income Taxes Railroads -- the
most capital-intensive component of the industrial sector of the U.S. economy
5-- are further disadvantaged vis a vis their competitors by existing capital
recovery provisions of the income tax laws. For income tax purposes, railroads
must capitalize and depreciate, over a period of years, the costs incurred in
building new or expanding their existing infrastructure. In addition, the
Internal Revenue Service argues that railroads must capitalize many of the costs
of repairing and maintaining that existing infrastructure. In contrast, the fuel
taxes paid by trucking companies (used for both new capital expenditures and
highway repair and maintenance) can be deducted immediately. As a result,
trucking companies obtain an economic advantage for each infrastructure dollar
they spend. For example, $1 00 capitalized by railroads produces depreciation
deductions with a net present value of only $26, resulting in a $74 true
economic cost. In contrast, $1 00 of fuel tax paid by trucking companies
produces a $35 immediate tax benefit, resulting in a $65 true economic cost. If
a railroad is subject to the Alternative Minimum Tax (AMT), the disparity in the
true economic cost of capitalized infrastructure investment is further
exacerbated, since accelerated depreciation deductions are a preference item for
calculating the AMT but fuel tax deductions are not. This economic advantage
enjoyed by trucking companies under the income tax laws is in addition to the
economic advantage heavy trucks obtain by paying less than two- thirds of the
infrastructure damage costs they generate. Employment Taxes Railroads payroll
taxes are higher than any other industry. Railroad employees are covered by the
Railroad Retirement System, which is significantly more expensive than the
Social Security System, further disadvantaging the freight railroads' ability to
compete. In tota , rail employers and employees pay retirement payroll taxes of
36.3 percent compared with 15.3 percent paid by their competitors.6 Over and
above the social security equivalent, railroad employers annually contribute
some $2.0 billion and railroad employees contribute $560 million into the
railroad retirement system. Rail employers also fund a government- administered
supplemental pension plan for railroad workers; this additional obligation cost
the industry over $141 million in fiscal year 1999. Moreover, government imposed
investment restrictions on railroad retirement Rinds significantly limit their
returns, making the system more expensive for the industry.7 State and Local
Taxes Railroads historically have been subject to discriminatory state and local
taxes, so much so that in 1976, Congress passed legislation intended to prohibit
future discriminatory taxation of railroads by states. In recent years, however,
the United States Supreme Court has been expanding states rights in many areas.
This expansion threatens the protection from predatory state taxation provided
to the industry by the 1976 legislation. Relieving the Railroad Industry of
Inequitable Tax Treatment Would Facilitate Much- Needed Investment by the
Industry in its Infrastructure A prompt leveling of the playing field would be
the most effective means to correct the competitive inequity caused by the
current structure and to facilitate much-needed railroad infrastructure
investment. Since 1980, major freight railroads have spent more than 260 billion
to maintain and improve their infrastructure and equipment. Despite such
enormous investments, over the next 20 years the railroad industry will need to
make new expenditures equal to the cost of rebuilding that infrastructure twice
over to meet the country's transportation needs. Elimination of the inequities
in current tax laws would help provide railroads with access to additional
sources of capital to enhance the industry's ability to more efficiently and
safely meet the freight transportation requirements of a growing economy. Trust
Funds Are Not the Answer Congress should reject suggestions that the railroads'
fuel tax be transferred into a government-administered railroad trust fund.
Several proposals to use the 4.3 cents per gallon deficit reduction fuel tax
paid by the railroads and barges have been made, including the creation of new
government trust funds to finance short-line/regional railroad improvements,
inter-city or commuter passenger rail needs, and highway-rail crossing traffic
control devices. In these scenarios, the beneficiaries of the funds, while
having contributed little or nothing, would profit from a cross-subsidy from the
large freight railroads. Large freight railroads oppose contributing to a trust
fund that could be used to finance infrastructure improvements of competing
railroads, and it is inappropriate to expect the large railroads to provide
additional funding support for passenger rail, short- lines, or highway-rail
traffic control devices. Cross-subsidies are bad public policy, and the fuel tax
revenues paid by freight railroads are needed to meet their own significant
infrastructure needs. Finally, large railroads do not care to finance their own
infrastructure needs by inefficiently sending funds to Washington, D.C., simply
to be returned to them, minus bureaucratic administrative and overhead costs.
Conclusion As the first step toward eliminating the tax law inequities that
competitively disadvantage the railroad industry, the AAR urges Congress to
eliminate the unfair tax burden imposed on the railroad industry by the deficit
reduction fuel tax. The AAR urges the prompt enactment of H.R. 1001 repealing
the 4.3 -cent deficit reduction fuel tax. This unfair tax increases the tax
burdens already imposed on railroads, burdens that already extend well beyond
those imposed on our chief competitors. The elimination of this unfair tax would
contribute toward increased infrastructure spending by railroads, thus
encouraging a growing and prospering railroad industry, consistent with sound
public policy. Beyond this first step, the AAR strongly recommends that Congress
eliminate all of the inequities in current tax laws thereby leveling the tax
playing field and allowing railroads better access to additional sources of
capital to enhance the industry's ability to more efficiently and safely meet
the freight transportation requirements of a growing economy.
LOAD-DATE: August 8, 2000, Tuesday
