Washington Senate Bill Report SB 5494 (Jan. 31, 2023)

Summary

A Washington Senate Bill Report on SB 5494, an act relating to government incentives for improving freight railroad infrastructure, prepared by staff of the Senate Committee on Business, Financial Services, Gaming & Trade and dated as of January 31, 2023. The background describes railroad classes, short line railroads in Washington, federal and state funding for short lines, and the state's business and occupation, retail sales and use, and public utility taxes. The summary of the bill describes tax exemptions for track maintenance materials and credits for class II and III railroads of up to 50 percent of short line maintenance and up to 100 percent for new rail development, not to exceed $2 million for each. Credits may not be earned after June 30, 2034, and the report states the bill takes effect on January 1, 2024.

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                            SENATE BILL REPORT
                                  SB 5494

                                      As of January 31, 2023

Title: An act relating to government incentives for improving freight railroad infrastructure.

Brief Description: Providing incentives to improve freight railroad infrastructure.

Sponsors: Senators Wilson, J., Kuderer, King, Lovick, Dozier, Wilson, L., Liias, Schoesler,
    Warnick and Holy.

Brief History:
     Committee Activity: Business, Financial Services, Gaming & Trade: 2/02/23.


                                     Brief Summary of Bill
           • Creates business and occupation, retail sales and use, and public utility
             tax exemptions and credits for class I, II, and III railroads and other
             eligible taxpayers for donated materials, maintenance, modernization,
             and new construction on short line railroad track.


SENATE COMMITTEE ON BUSINESS, FINANCIAL SERVICES, GAMING & TRADE

     Staff: Alia Kennedy (786-7405)

     Background: Railroad Classifications. There are more than 560 freight railroads in three
     classification levels that operate nationwide. The United States Department of
     Transportation's Surface Transportation Board classifies types of railroads by carrier
     operating revenue, annually adjusted for inflation. Most railroad lines are owned and
     managed by holding companies, however, some are stand-alone railroads, leased lines, or
     publicly owned by a state, public port, or local jurisdiction.

     Class I:
        • annual operating revenue is more than $943.9 million;
        • large operators that cover significant portions of the country; and



     This analysis was prepared by non-partisan legislative staff for the use of legislative
     members in their deliberations. This analysis is not part of the legislation nor does it
     constitute a statement of legislative intent.

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         • railroads of this class operating in Washington: BNSF—1400 miles, 44 percent of
           the rail system, and Union Pacific—500 miles, 16 percent.

     Class II:
        • between $42.4 million and $943.9 million in annual operating revenue;
        • midsize carriers, typically regional; and
        • there is one Class II railroad operating in Washington at the Spokane interchange.

     Class III—short line:
        • annual operating revenue is less than $42.4 million;
        • small and regional, and typically move agricultural products;
        • there are 27 short line railroads operating in Washington with over 1400 miles of
           track—nearly 40 percent of the rail system;
        • short lines average from 1 to 150 miles in length; and
        • some railroads of this class operating in Washington are: Port of Chehalis Rail—1
           mile, Kettle Falls International Railway—36 miles, and Palouse River and Coulee
           City Rail System—300 miles.

     Washington State Short Line Rail Inventory and Needs Assessment. In 2015, the
     Legislature directed the Washington Department of Transportation to create an inventory
     and needs assessment on short line rail in the state. The report found that much of the
     existing short line rail system did not meet the state's current or future capacity and velocity
     needs for efficient operation. It was updated in 2021, with similar findings.

     Federal and State Funding for Short Lines. The United States Department of Transportation
     offers several grant programs and one business tax credit worth over $176 billion, available
     to railroads, including short lines. The Legislature appropriated $19.54 million in the 2021-
     23 biennium for four freight rail improvement preservation projects that benefit short lines.
     The Washington State Department of Transportation provides two programs to improve rail
     systems in the state. The Freight Rail Investment Bank provides loans for building new or
     improving existing rail infrastructure for the public sector only. A total of $5.08 million is
     available for loans in the 2021-23 biennium. The Freight Rail Assistance Program provides
     grants to private and public sector railroads, rail shippers or receivers, and port districts for
     rehabilitation, infrastructure preservation, and economic development. For the 2021-23
     biennium, a total of $7.04 million is available for grants. Requests for grants and loans for
     both programs in the 2021-23 biennium have exceeded available monies.

     Business and Occupation Tax. Washington's major business tax is the business and
     occupation (B&O) tax. The B&O tax is imposed on the gross receipts of business activities
     conducted within the state, without any deduction for the costs of doing business. The tax is
     imposed on the gross receipts from all business activities conducted within the state.
     Revenues are deposited in the State General Fund. There are several rate categories, and a
     business may be subject to more than one B&O tax rate, depending on the types of activities
     conducted. Current law authorizes multiple exemptions, deductions, and credits to reduce


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     the B&O tax liability for specific taxpayers and business industries.

     Retail Sales and Use Tax. Retail sales taxes are imposed on retail sales of most articles of
     tangible personal property, digital products, and some services. A retail sale is a sale to the
     final consumer or end user of the property, digital product, or service. If retail sales taxes
     were not collected when the user acquired the property, digital products, or services, then
     use tax applies to the value of property, digital product, or service when used in this state.
     The state, all counties, and all cities levy retail sales and use taxes. Some other local
     government entities and special purpose districts also impose sales and use taxes for
     specific purposes. The state sales and use tax rate is 6.5 percent; local sales and use tax
     rates vary from 0.5 percent to 3.9 percent, depending on the location.

     Public Utility Tax. The public utilities tax (PUT) is a tax on public service businesses,
     including businesses that engage in transportation, communications, and the supply of
     energy, natural gas, and water. The tax is in lieu of the B&O tax. There are different rates,
     depending on the specific utility activity. Railroads, railroad car companies, motor
     transportation and all other public service businesses are taxed at .01926 percent. Most of
     the funds are distributed into the State General Fund. A portion provides financial
     assistance to local governments for maintenance of public works facilities.

     Tax Preferences. All new tax preference legislation is required to include a tax preference
     performance statement. The performance statement must clearly specify the public policy
     objectives of the tax preference, and the specific metrics and data that will be used by the
     Joint Legislative Audit and Review Committee (JLARC) to evaluate the efficacy of the tax
     preference. In addition, an automatic ten-year expiration date is applied to new tax
     preferences if an alternate expiration date is not provided in the new tax preference
     legislation.

     Summary of Bill: Business and Occupation Tax and Public Utility Tax. A B&O tax and
     PUT exemption is created for class I railroads for the value of products or gross receipts of
     sales of materials required for track maintenance. The exemptions expire June, 30, 2034.

     A B&O tax and PUT credit is created for class II and III railroads or other eligible taxpayers
     as follows:
         • up to 50 percent of short line railroad maintenance, not to exceed an amount equal to
            $5,000 multiplied by the number of miles of railroad track owned or leased in the
            state at the end of the year;
         • up to 100 percent for new rail development, not to exceed $2 million for each new
            rail development; and
         • up to 100 percent for modernization and rehabilitation expenditures.

     Credits may be carried forward for up to five years. Other eligible taxpayers include
     railroads owned by a port, city, or county or an owner or lessee of rail siding, industrial
     spur, or industry track located on or adjacent to a class II or III railroad. Credit recipients


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     may transfer all or a portion of any unused credits to any taxpayer subject to B&O tax or
     PUT. No credits may be earned after June 30, 2034.

     A B&O and PUT credit is also created for class I railroads for the fair market value of
     donated materials transferred to a class II or III railroad or other eligible taxpayers. Credit
     recipients may transfer all or a portion of any unused credits to any taxpayer subject to
     B&O tax or PUT. No credits may be earned after June 30, 2034.

     Sales and Use Tax. A sales and use tax exemption is created for materials required for track
     maintenance for class II or III railroads or other eligible taxpayers. The tax exemption
     expires June 30, 2034.

     The bill includes a tax preference performance statement that states the Legislature intends
     to extend the tax preferences if a review finds that freight rail system in the state has been
     maintained or improved.

     Appropriation: None.

     Fiscal Note: Available.

     Creates Committee/Commission/Task Force that includes Legislative members: No.

     Effective Date: The bill takes effect on January 1, 2024.




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