January 4, 1982 - Maritime Reporter and Engineering News

Tax Act Creates 'New Subsidy7 For Railroads

The nation's railroads will receive major profit windfalls in the next few years due to a change of accounting methods allowed them in the Economic Recovery Tax Act of 1981, according to a study conducted by the Chicago law firm of Lord, Bissell & Brook.

The study was jointly published by a coalition of barge industry associations, including The American Waterways Operators, Inc. (AWO). It was commissioned by members of the industry who are concerned with the competitive impact of this major new tax break for the railroads.

The study cites findings in independent reports by several banks and investment houses, showing that the 1981 Tax Act provides a special bonanza worth over $16 billion for railroads by switching them from one form of accounting, which was previously available only to railroads, to the new accelerated cost recovery system (ACRS accounting), which is applicable to taxpayers generally.

Under the accounting system used by railroads prior to the 1981 Act — retirement-replacement- betterment tax accounting ("betterment accounting") — a GAO study showed that 10 selected, high-revenue Class I railroads received benefits during 1976-78 totaling nearly $1 billion.

AWO president Anthony L.

Kucera said, "Betterment accounting has long given the railroads a financial benefit not available to any other industry. This large infusion of cash from the write-off of railway roadbeds is being given by the government to the railroad industry as a sweetner for converting ACRS, the tax depreciation system applicable to taxpayers generally. We regard this as yet another federal subsidy to the railroads," said Mr.

Kucera.

A First Boston Corporation report dated June 26, 1981, concluded that the new depreciation accounting procedures for railroads "will dramatically increase depreciation for tax purposes, and for the most profitable railroads could eliminate much of current tax liability for the first three to four years." A report by Harris Trust and Savings Bank of Chicago said about the railroads it studied that "it is doubtful that any of these companies would have to pay taxes over the next five years," because of benefits received from this act. For example, the vice president of a major railroad was quoted in the Wall Street Journal as saying, "this year's working capital figure includes $66.5 million due to the company's decreased current tax liability." Dean Witter Reynolds Inc., the investment firm, concluded in a separate study that "the cash flow ramifications are enormous" for railroads as a result of the 1981 act.

AWO's Mr. Kucera said, "The underlying significance of the over $16-billion tax break is that it comes at a time when the railroads are leading a move to burden, if not cripple, the barge and towing industry with numerous tax increases. The net effect is to reduce the competitiveness of the barge lines while increasing the competitiveness of the railroads —all working in total contradiction to the free market objective being promoted by the Administration." AWO is a 300-member national trade association that represents the interests of the barge and towing industry.

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