Recognizing rail’s public benefits and harnessing its potential

Posted by Malcolm Kenton
on Monday, August 27, 2018

The bulk of the nation’s railroad network consists of privately owned and maintained steel thoroughfares whose existence and maintenance benefits the public in a number of ways. We benefit as consumers of goods delivered by rail, as users of highways less congested and burdened by trucks, as breathers of cleaner air, and as patrons of passenger trains, to name a few ways. A handful of tweaks in public policy that recognize the tremendous value that Americans receive from the private sector’s investment in rail service and infrastructure would incentivize railroads to make further capital improvements — and would also help America’s travelers.

Union Pacific auto-rack train in the median of the Hardy Toll Road in North Houston, Tex. in March 2012. Photo by Roy Luck / flickr.com.
Trucks impose the lion’s share of the wear and tear on roads and highways that consumes road maintainers’ budgets. They also make driving more stressful. Railroads, on the other hand, are (at least in theory) common carriers of freight with an obligation to serve any shipper that pays the established rate and meets logistical criteria. As such, railroads provide energy and space-efficient avenues for commerce, which lowers the cost of goods, means less air pollution than would otherwise result from all that freight moving by truck or air, and support numerous businesses of all sizes by serving as a keystone species in a commercial ecosystem.

Moreover, railroads maintain transportation corridors that can be, and are, used  by the military to support national defense by moving personnel and equipment. They could be commandeered by the government to support a war effort. For this reason, the Federal Railroad Administration maintains a list of railroad corridors that are designated as strategic defense assets, known as STRACNET. It is worth noting that one of the characteristics that defines a rail corridor as a STRACNET asset is the presence of Amtrak service, along with a high volume of freight traffic.

The American people, by means of our government, give private commercial railroads the unique privilege of controlling significant stretches of land and being immune from a number of state and local laws and ordinances, while also being subject to minimal regulation with regards to rates and service levels. The government has also recently imposed a hefty unfunded mandate on the railroads in the form of positive train control (which could have been approached in a more holistic manner that would produce benefits for railroads and their users beyond safety, but I digress). 

Conversely, railroads are liable for property taxes in most of the jurisdictions in which they own property, along with all other federal and state corporate taxes. This means that the more they improve their property (by adding capacity through double- and triple-tracking, upgrading signal systems, expanding or building new yards and terminals, etc.), the higher the property’s assessed value, and thus the more their tax bills rise. Economists call this a perverse incentive, as current tax policy prompts railroads to minimize their physical plant and unnecessarily constrain their capacity. 

Over 100,000 track miles have been lost because of this. Fred Frailey’s observations from his recent Empire Builder trip provide an example of the consequences of a lack of fluidity due to reduced track capacity — a situation that in the long term is untenable for both the host railroad and Amtrak. And this occurs on the only Class I railroad that is not publicly traded. Yes, maintenance costs can also rise with more trackage to maintain, but track maintenance — unlike paying taxes — is optional at the margin. A railroad can keep track in place but not maintain it unless and until it is needed in the future, but property taxation penalizes this approach.

In the 1950s, the Association of American Railroads, the Class Is’ trade group, campaigned vociferously in public forums against the government’s punitive policy of taxing railroad property while at the same time heavily subsidizing railroads’ competing modes.  Yet the AAR is strangely silent on this subject today — though the same policy dynamic remains, the group’s attitude seems to be that everything is hunky-dory as long as rate and service level regulation is not reintroduced. The AAR’s position seems more driven by the narrow short-term interests of railroad shareholders in the next quarter’s profits than by the broad long-term interest of the industry in maintaining reliable high-capacity avenues for future business.

Here is a thought exercise that is worth pondering, though the degree to which railroads and other stakeholders would embrace it is unknown: What would happen if state and local governments, perhaps as part of a trial exercise in part of the country, stopped charging railroads property taxes, or only charged them a small flat per-acre rate that would not vary with the property’s assessed value? Perhaps this relatively simple change in public policy would incentivize railroads to make improvements and expand capacity in ways they may currently disfavor because of the tax consequences. 

Tracks to the future? A railroad in Litchfield, Northern Territory, Australia in March 2013. Photo by Louise Law / flickr.com.
The railroads should not, however, simply be relieved of this tax burden without the public getting something in return. Railroads thus relieved should be required, as a matter of federal policy, to set aside a certain percentage of capacity on a designated network of main lines for passenger service. This should be a more expansive network than the skeletal web of routes that Amtrak currently operates, and the amount of capacity set aside should be sufficient for at least three daily passenger train frequencies on the designated corridors, be they short- or long-distance routes. 

Railroads could fulfill the obligation to host passenger trains either by operating passenger service in-house without subsidy (the property tax relief being granted in lieu of a direct subsidy), or by providing free or very-low-cost access to a private franchisee that is qualified by FRA and supported by the federal government and/or one or more state governments. This could be Amtrak or a company like Herzog or Keolis, or Amtrak could serve as the franchising authority in lieu of FRA. A greatly lowered cost of operating over host railroads, combined with a national rail passenger liability insurance pool, station-area real estate value capture, and other self-sustaining methods of funding passenger rail’s capital needs are what will ultimately enable the entire network to be operationally self-sufficient. Continuing to cut Amtrak’s operating costs to the bone under the current paradigm will only achieve the opposite of this end.

I don’t claim to have all the details of this idea worked out. I suggest it merely as a novel approach to consider, as it would not require a complex new law or regulatory regime, but would fundamentally alter a stale status quo on the passenger front. We are perpetually bogged down in arguments over operating losses and subsidies, when we should be harnessing passenger rail’s potential to serve as the economic engine that it could be if it were not the red-headed stepchild of national transportation policy. Such a paradigm shift could unlock more private investment in capacity expansion and greater efficiency for freight service while also spurring a passenger rail renaissance.

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