Thursday, April 27, 2017

Trump tax cuts good for railroads? Probably not

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Trump tax cuts good for railroads? Probably not The New York Times/Eric Thayer

The Trump Administration on April 26 released a proposed overhaul of the federal income tax system that promises to simplify the tax structure as well as reduce the rate at which large corporations are taxed to 15%.

Association of American Railroads President and CEO Edward R. Hamberger issued the following statement applauding the Trump Administration’s plan:

“To spur economic growth and unleash innovation, we need a simpler, fairer tax code that works for American businesses. The freight rail industry applauds today’s bold step toward restoring balance to our tax code and reducing the corporate rate to a globally competitive level.

“Currently, the major freight railroads pay on average a 33.5% effective federal tax rate and that climbs to 37% when state taxes are included. For the privately owned rail industry, a more competitive business tax rate means a more competitive freight rail sector, which leads to more investments and a stronger network to serve customers and the economy.”

However, as Railway Age Capitol Hill Contributing Editor and economist Frank Wilner points out, “Railroads should have two concerns with the Trump Administration tax proposal. First, railroads don’t pay the statutory (35%) tax rate. The 33.5% effective tax rate cited by the AAR is well above what economists and financial analysts consider the relevant figure—actual cash-taxes-paid—that reflects deductions and deferred taxes. The cash-taxes-paid rate for U.S.-based Class I railroads for the three years through 2015 is: BNSF, 23.3%; CSX, 25.6%; Kansas City Southern, 10.4%; Norfolk Southern, 26%; and Union Pacific, 27.4%.

“Thus, a Trump-proposed statutory corporate tax rate of 15% (boldly assuming Congress is willing to go that low given the predicted surge in the national debt as a result) produces a considerably smaller savings for railroads, as it would exclude most, if not all, deductions and other tax savings enjoyed under the 35% statutory rate.

“Second, a reduction of the statutory tax rate could especially adversely impact regional railroads and short lines, which stand to lose, as a result of the tax plan, the 50% 45G investment tax credit that has long fueled their capital investment programs. Genesee & Wyoming, for example, already has a cash-taxes-paid rate of under 10%, so its cash-taxes-paid rate actually could rise as they lose various deductions and deferments, plus the 50% investment tax credit.

“For industries with overseas operations that park profits abroad in lower-tax havens to avoid higher U.S. corporate tax rates, the popular expectation is that those profits will be repatriated and used for job-creating domestic investment that, in turn, could generate more rail traffic. The reality is less certain, as there is no requirement to repatriate those profits or to require they be invested in new U.S. plant and equipment, if actually repatriated (as the repatriated dollars also could, for example, be returned to investors through higher dividends or stock buybacks).”

(To determine the cash-taxes-paid rate, divide cash-taxes-paid as reported in the railroad’s cash-flow statement, by pre-tax income as reported in the railroad’s income statement. A three-year average normalizes for anomalies in a single year. Norfolk Southern, for example, had a cash-taxes-paid rate of 15.8% in 2015, but its three-year average was 26%.)

Adds another observer and economist, “Is AAR’s current Trump tax plan support its way of bartering for an Administration retreat on import tariffs? The trade issue (as does Trump’s proposal to scrap or restructure NAFTA) creates legitimate railroad industry concern. AAR’s support looks like the happiest face on what otherwise appears to be simple pandering.”

"We expect that the 45G credit will remain part of the conversation on the tax code as legislative proposals are developed," said Linda Darr, president of the American Short Line and Regional Railroad Association, in a statement. "The 45G credit has always had strong bi-partisan support in both Houses, and supports the call for public-private partnerships to address our nation’s infrastructure needs."

Editor’s note: Railway Age is appreciative of the efforts of financial consultant C. Howard Capito, who graciously provided data for BNSF.

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