The second meeting of the Short Line Railroad Revitalization Task Force was held on Tuesday, December 4, 2007, at 10:00 AM, in Room 129 of the Capitol Annex. Senator Brett Guthrie, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Brett Guthrie, Co-Chair; Senator Ed Worley; Representatives Hubert Collins and Fred Nesler; Mike Hancock, Sarah McCann, Fred Mudge, Tony Reck, and Ken Robinson.
Guests Appearing Before the Task Force: Sean Craig, Director, Tax Department, CSX Transportation, Inc.; Charles E. Lex III, Assistant Director State Taxes, Norfolk Southern Corporation; and Gay Dwyer, Paducah and Louisville Railway, Inc.
LRC Staff: John Snyder, Brandon White, and Linda Hughes
Representative Nesler moved to approve the Task Force's minutes from its November 8, 2007 meeting. Representative Collins seconded the motion, which passed by voice vote.
Sean Craig, Director, Tax Department, CSX Transportation, Inc., discussed the importance of short lines and effects of various assistance programs on Class I railroads. Mr. Craig said that CSX Transportation is a Class I rail carrier operating in Kentucky. It maintains 1,700 miles of track, 3,000 grade crossings, annually handles around 900,000 carloads of freight and employs more than 2,600 Kentuckians with a payroll of $117 million. Mr. Craig said that CSX provides transportation services to 400 industries and invested $95 million in 2006 to maintain and upgrade its tracks in Kentucky alone.
Mr. Craig said that the demand for freight transportation services both in Kentucky and throughout the nation has experienced unprecedented growth over the past decade and is expected to increase in the future. Lack of space and resources to continue to expand the nation's roadways are major reasons for this growth. He said to meet this demand, rail infrastructure investment will have to grow. The nation's freight railroads are investing record amounts in their systems, but the amount of capital available to the railroads alone is insufficient to meet the demands placed upon our nation's rail system.
Mr. Craig said that railroads are much more capital intensive than other industries - spending 17 percent of revenue on capital expenditures. These rail systems are the only transportation mode that must both build and maintain their own infrastructure. He said that this capital expenditure figure is five times higher than the average for US manufacturers.
Mr. Craig said that while a tax on diesel fuel consumption would be one option, he believed that a more desirable approach would be a tax credit system. He said a tax credit approach requires the railroads to be active partners in the expansion and safety projects. He said that other states, who have addressed this issue in recent years, have chosen a tax credit system. He said that CSX strongly encourages the task force to recommend a tax credit program that would help ensure that the state's rail infrastructure remains strong.
Charles E. Lex III, Assistant Director State Taxes, Norfolk Southern Corporation, also discussed the importance of short lines on Class I railroads. Mr. Lex said that Norfolk is about one-third the size of CSX in Kentucky with its biggest line operating between Danville and the Tennessee border. Mr. Lex said that Norfolk operates 600 grade crossings and spends approximately $500,000 yearly to maintain these crossings. He noted that any incentives would be welcomed, especially those incentives addressing grade crossings. He too stated that a tax incentive program would be a more desirable approach.
Senator Worley asked if and why the Class I rail systems do not provide personal rail services. Mr. Lex said that the Class I railroads do not have the personnel nor resources to provide such services. He stated that the Class II and III rail systems can more adequately provide these services. Mr. Reck stated that a used locomotive in good operating condition will cost Paducah and Louisville Railway around $300,000 as compared to new locomotive costing a Class I system around $1.8 million. Mr. Reck said that short line locomotives do not require the speed nor weight hauling capabilities as do the Class I type locomotives.
Ken Robinson, responding to a question raised at the task force's November 8 meeting, said that according to the Cabinet for Economic Development's records, no business interested in locating in Kentucky has been lost due to the lack of a rail system nearby.
Representative Nesler, along with Gay Dwyer, Paducah and Louisville Railway, Inc., discussed Representative Nesler's 2006 Regular Session House Bill 539. House Bill 539 was unsuccessful during the 2006 Session. Representative Nesler said that his bill attempted to address three major components: short line rail improvements, grade crossings, and rail expansion for energy products. The bill offered: (1) a tax credit of 50 percent of the cost of line maintenance or improvement to Class II and III railroads up to $3, 500 per track mile in any given year; (2) a tax credit of 25 percent of the cost of grade crossing improvements to all railroads; and (3) a tax credit of 25 percent of the cost of expansion for energy products to all railroads. The total statewide tax credit for all railroads for the grade crossing program and the energy program are capped at $1 million each per year.
Representative Collins stated that he understood Representative Nesler to say his bill would need to be amended if the legislature wishes to offer the same tax credits for general line maintenance to all rail systems. Representative Nesler said yes, the rail line improvement tax credit is presently only available to Class II and Class III railroads. He noted that both the grade crossing and energy incentives is available to all class systems.
Chairman Guthrie stated that he wanted the task force to understand that this bill does not offer any type of fuel incentives but does offer incentives in three other areas.
Representative Collins moved to have staff draft the measures of 2006 HB 539, including offering the 50 percent tax incentives for grade crossings to all rail systems, as the task force's recommendation to LRC. His motion also included allowing the co-chairs the authority to sign and deliver to LRC the task force's recommendation. Representative Nesler seconded the motion.
Senator Worley stated that he was uneasy adopting this measure without further discussions and noted that in his opinion a $3,500 tax incentive cap for short line rail improvements did not seem adequate. He said that he was afraid that by recommending this amount the task force would be restricting itself from increasing the amount during legislative negotiations in future legislative sessions.
After a brief discussion Representatives Collins and Nesler withdrew their motions. Hank List, Associated Industries of Kentucky, stated that he would like to see the task force expand its report to educate other members of the General Assembly of the railroads economic restraints. He said that in his opinion having whereas clauses in the legislation would help the measure immensely.
Chairman Guthrie asked staff to draft legislation parallel to Representative Nesler's House Bill 539, with whereas clauses outlining the importance of freight rail to the Commonwealth. Staff was then directed to draft a second piece of legislation, identical to the first but eliminating all financial caps.
With no further business before the task force Chairman Guthrie informed the members that the next meeting would be held at 10:00 a.m. on December 13 in Room 129 in the Annex Building. The meeting adjourned at 11:40 a.m.