CPE’s new report From Tax to Tracks: Modernizing the 45G Tax Credit identifies the latent potential of this tax credit to supercharge passenger rail development on freight-railroad-owned corridors. Currently, the relationship between passenger and freight rail improvements is mediated by one-off funding infusions for passenger. A modernized 45G provides stable, programmatic funding and allows American’s largest freight railroads to improve their own corridors, for their benefit and the benefit of passenger rail.
Our accompanying storymap identifies how these policy recommendations interact with the national rail network. Access the storymap here.
Executive summary
Passenger rail funding in the United States is characterized by a reliance on discretionary grants or one-off transfers. While the Infrastructure Investment and Jobs Act (IIJA) provided more money and a measure of funding certainty with advance appropriations, it did not change this funding structure. At the same time, it created the Corridor Identification and Development Program (Corridor ID) to plan intercity rail improvements or expansions from idea to implementation. Corridor ID does not, however, come with any funding for final design or construction activities. The United States has in the Corridor ID program a planning program for new or improved passenger rail lines, without any dedicated funding to build planned improvements. However, it also has a source of steady, programmatic funding in the Railroad Track Maintenance Tax Credit, albeit one currently limited by statute. Modest tweaks to the Railroad Track Maintenance Tax Credit (the 45G tax credit or 45G) could provide a source of stable funding to specifically support improvements identified—but not funded—under the Corridor ID program. This proposed pairing marries a planning program with a source of predictable, programmatic funding.
Currently, Corridor ID provides direct funds for the development of a Service Development Plan (SDP) and for subsequent project development steps. The ability to step through non-construction phases and the consistent support of the Federal Railroad Administration (FRA) make Corridor ID a strong program, and one that avoids the pitfalls of the capital-funding-first, planning-second US model. However, it is currently hampered by a lack of dedicated construction funding. After stable funding and technical support in design and engineering, project sponsors must run the gauntlet of federal grant programs (many of which face an uncertain future), adding time and uncertainty to final design and construction. Unlocking even a modest amount of capital spending under the 45G program, then, can provide a source of stable, predictable funding for actual construction on Corridor ID routes. Critically, Class I eligibility would be gated by Corridor ID: a Class I railroad could claim the credit only for investments enumerated in an FRA-approved Service Development Plan on a selected corridor. Corridor ID supplies the targeting; 45G supplies the capital. The credit is not a directionless subsidy but construction funding for a pipeline the public sector has already vetted.
As it stands, the 45G program provides a tax credit to smaller Class II and Class III railroads to conduct state-of-good-repair activities. Railroads are eligible for a tax credit of up to 40 percent of qualified expenses, capped at $3,500 per track-mile. Importantly, this cap is based on all track-miles across the system, not just those on which work is done. In other words, a railroad with significant track mileage across its entire network could claim a significant amount of reimbursement for work done on a smaller corridor. This cap structure sets the stage for 45G to evolve into a far more impactful program.
Three changes can turn 45G into a stable capital funding source while expanding the program’s utility for all users. First, Congress should add elective pay to 45G. Elective pay allows government instrumentalities or otherwise tax-exempt entities to receive the full value of a tax credit. Second, the set of eligible activities should be expanded beyond those focused on maintaining a state of good repair to allow new investments in electrification, signal work, and capacity enhancement like double/triple tracking. Third, Class I railroads should be eligible for 45G for investments carried out on routes in the Corridor ID planning process. This change would vastly expand the value of the program for passenger rail by including beneficial upgrades for passenger rail and more generally by making Class Is more inclined to make investments on routes used by passenger rail (which describes most passenger routes in the US).
Historically, Class Is have been hesitant to allow passenger service, and insist on unrealistic and expensive investments when concurrent with passenger service does occur on their lines, even when many of these investments also benefit freight rail. This dynamic is particularly salient for Corridor ID routes; for current projects, over 75 percent of relevant route mileage is owned by Class Is alone. 45G funding puts the public sector in the role of a pass-through equity funder, providing stable funding for Class Is to carry out upgrades, many of them mutually beneficial, while being (partially) reimbursed.
Class II and Class III railroads would remain universally eligible for the program, at a higher mileage rate and with more allowable expenses. These changes would make the 45G tax credit relevant for passenger rail, expand monetization pathways for the credit via elective pay, and make two already-promising programs, Corridor ID and 45G, considerably more valuable.
The amount of investment unlocked is significant. Based on proposed increases in per-mile reimbursements and current network mileage caps, these changes could unlock up to $2.8 billion per year (among all Class I carriers), indefinitely, at a cost to the federal government of around $1.1 billion. This estimate does not account for other changes to the program, including eligibility for transferability/chaining or the increased leveraging from paired federal construction lending. The key here is that 45G, as written, is based on network track-miles. Keeping this standard while allowing Class I railroads to qualify only for specific investments on Corridor ID routes focuses investment, allowing significant per-mile expenditure.