Fiscal Note — S 3942, Incentives for Improving Freight Railroad Infrastructure (Department of Revenue)
Summary
Individual State Agency Fiscal Note from the Department of Revenue for Bill S 3942, AN ACT Relating to government incentives for improving freight railroad infrastructure, which states that it reflects draft legislation S-3942.1, 2024 Legislative Session. The narrative describes a business and occupation tax credit for short line railroads for qualified expenditures, equivalent to 50% of the expenditures in several categories. It states that credits may not exceed $1 million for each taxpayer per year combined. Part I lists GF-State expenditures of 1,008,200 for 2023-2025 Total and ends with a revenue impact table by biennium.
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“Fiscal Note — S 3942, Incentives for Improving Freight Railroad Infrastructure (Department of Revenue).”
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Individual State Agency Fiscal Note
Bill Number: S 3942 Bill Title: AN ACT Relating to government Agency: 140
incentives for improving freight railroad Department of Revenue
infrastructure
Part I: Estimates
[ ] No Fiscal Impact
Estimated Cash Receipts to:
Fund Fiscal Year 2024 Fiscal Year 2025 2023-2025 Total 2025-27 Biennium 2027-29 Biennium
GF-State Retail Sales Tax (140,000) (140,000) (330,000) (350,000)
GF-State Business and
(900,000) (900,000) (7,200,000) (7,200,000)
Occupation Tax
GF-State Public Utilities Tax (900,000) (900,000) (7,200,000) (7,200,000)
Total (1,940,000) (1,940,000) (14,730,000) (14,750,000)
Estimated Expenditures from:
Fiscal Year 2024 Fiscal Year 2025 2023-2025 Total 2025-27 Biennium 2027-29 Biennium
FTE Staff Years 1.06 2.6 1.83 .9 .7
Fund
GF-State 001 284,400 723,800 1,008,200 189,500 146,400
Total 284,400 723,800 1,008,200 189,500 146,400
The revenue and expenditures estimates on this page represent the most likely fiscal impact. Factors impacting the precision of
these estimates, and alternate ranges (if appropriate), are explained in Part II.
Check applicable boxes and follow corresponding instructions:
[X] If fiscal impact is greater than $50,000 per fiscal year in the current biennium or in subsequent
biennia, complete entire fiscal note form Parts I-V.
[ ] If fiscal impact is less than $50,000 per fiscal year in the current biennium or in subsequent biennia,
complete this page only (Part I).
[ ] Capital budget impact, complete Part IV.
[ ] Requires new rule making, complete Part V.
Legislative Contact: ALIA KENNEDY Phone: 360-786-7405 Date: 1/16/2024
Agency Preparation: BETH LEECH Phone: (360) 534-1513 Date: 1/16/2024
Agency Approval Valerie Torres Phone: (360) 534-1521 Date: 1/17/2024
OFM Review: Phone: Date:
OFM Form FN (10/95)
Fiscal Note # S3942-1
Bill # S 3942
1
Part II: Narrative Explanation
II. A - Brief Description Of What The Measure Does That Has Fiscal Impact
Note: This fiscal note reflects language in draft legislation S-3942.1, 2024 Legislative Session.
CURRENT LAW:
Railroads pay public utility (PU) tax as public service businesses that engage in transportation in lieu of the business and
occupation (B&O) tax. Railroads also pay retail sales and use tax to purchase materials required for track maintenance.
PROPOSAL:
BUSINESS AND OCCUPATION TAX CREDIT FOR SHORT LINE RAILROADS (section 2):
This section provides a B&O tax credit to qualified short-line railroads for qualified expenditures made by an eligible
taxpayer. Credit issued and approved by the Department of Revenue (department) in one calendar year and not claimed in
that calendar year may be carried forward for five additional calendar years.
Qualified expenditures may be used to generate a credit for the following amounts:
- Short-line railroad maintenance expenditures equivalent to 50% of the expenditures up to $3,500 multiplied by the miles
of railroad track owned or leased in Washington at the close of the taxable year.
- New rail development equivalent to 50% of the expenditures.
- Modernization and rehabilitation to upgrade rail, switches, tracks, and bridges, equivalent to 50% of the expenditures.
The credits earned for railroad maintenance, new rail development, rail modernization, and rehabilitation products
expenditures under this section and section 6 may not exceed $1 million for each taxpayer per year combined. The
department must disallow any credits earned or portions thereof, that would cause the total amount of credits claimed
under this section and section 6 of this bill to exceed, in the aggregate, $15 million in any calendar year.
The B&O tax credits may be transferred to any person subject to B&O tax. No new credits may be earned after December
31, 2035.
To claim or transfer a credit, the person applying must complete an application based on qualified expenditures incurred
during the previous calendar year. The department must rule on applications within 60 days of receipt. It may extend the
time of processing the application upon notice to the taxpayer and an explanation of why a ruling on the application
cannot be completed within such time.
An eligible taxpayer is any railroad subject to B&O tax and classified by the United States Surface Transportation Board
as a class II or class III railroad, any railroad owned by a port, city, or county in the state, or any owner or lessee of rail
siding, industrial spur, or industry track located on or adjacent to a class II or class III railroad in the state.
Qualified expenditures do not include those used to generate a federal tax credit or expenditures funded by a state or
federal grant.
This credit does not apply to class I railroads or short-line railroads owned by a class I railroad or any of its subsidiaries.
No credit may be earned after January 1, 2036, and no credit may be claimed on tax returns filed for reporting periods
beginning on or after January 1, 2042.
BUSINESS AND OCCUPATION TAX CREDIT FOR RAILROAD MATERIAL RECYCLERS (section 3):
OFM Form FN (10/95)
Fiscal Note # S3942-1
Bill # S 3942
2
This section provides a B&O tax credit for companies that recycle railroad materials if the company transfers to an
eligible taxpayer rail, ties, tie plates, joint bars, fasteners, switches, ballast, or other equipment or materials that are part of
the rail infrastructure to be installed on tracks used by class II and III railroads. The credit is equal to the fair market value
of the donated materials.
Materials must be given to a qualifying recipient without consideration. The department must provide in a rule a standard
for determining the fair market value of donated materials.
Credit earned in one calendar year and not claimed in that calendar year may be carried forward for five additional
calendar years.
This credit may not be earned for materials donated to short-line railroads owned by a class I railroad or any of its
subsidiaries.
The B&O tax credit may be transferred to any person subject to B&O tax. No credit transfer applications may be
submitted for materials donated after December 31, 2036. No new credits may be earned after January 1, 2037, and no
credit may be claimed on tax returns filed for reporting periods beginning on or after January 1, 2042.
RETAIL SALES AND USE TAX EXEMPTION (sections 4 and 5):
These sections exempt from sales and use tax materials required for track maintenance by owners and operators of class II
or class III railroads, any railroad or freight rail facility owned by a port, city, or county in the state, or any owner or
lessee of rail siding, industrial spur, or industry track located on or adjacent to the railroad.
Sellers making tax-exempt sales must obtain an exemption certificate from the buyer.
Materials required for track maintenance are defined as rails, ties, tie plates, joint bars, fasteners, switches, ballast,
subgrade, roadbed, bridges, industrial leads, sidings, signs, safety barriers, crossing signals and gates, and track when used
for the purpose of track maintenance.
These sections expire January 1, 2036.
PUBLIC UTILITY TAX CREDIT FOR SHORT LINE RAILROADS (section 6):
This section provides a PU tax credit to qualified short-line railroads for qualified expenditures made by an eligible
taxpayer. Credit earned in one calendar year and not claimed in that calendar year may be carried forward for five
additional calendar years.
Qualified expenditures may be used to generate a credit for the following amounts:
- Short-line railroad maintenance expenditures equivalent to 50% of the expenditures up to $3,500 multiplied by the miles
of railroad track owned or leased in Washington at the close of the taxable year.
- New rail development equivalent to 50% of the expenditures.
- Modernization and rehabilitation to upgrade rail, switches, tracks, and bridges, equivalent to 50% of the expenditures.
The credits earned for railroad maintenance, new rail development, rail modernization, and rehabilitation products
expenditures under this section and section 2 may not exceed $1 million for each taxpayer per year combined. The
department must disallow any credits earned, or portions thereof, that would cause the total amount of credits claimed
under this section and section 2 of this bill to exceed, in the aggregate, $15 million in any calendar year.
The PU tax credits may be transferred to any person subject to PU tax. No new credits may be earned after December 31,
2035.
OFM Form FN (10/95)
Fiscal Note # S3942-1
Bill # S 3942
3
To claim or transfer a credit, the person applying must complete an application based on qualified expenditures incurred
during the previous calendar year. The department must rule on applications within 60 days of receipt. It may extend the
time of processing the application upon notice to the taxpayer and an explanation of why a ruling on the application
cannot be completed within such time.
An eligible taxpayer is any railroad subject to PU tax and classified by the United States Surface Transportation Board as
a class II or class III railroad, any railroad owned by a port, city, or county in the state, or any owner or lessee of rail
siding, industrial spur, or industry track located on or adjacent to a class II or class III railroad in the state.
Qualified expenditures do not include those used to generate a federal tax credit or expenditures funded by a state or
federal grant.
This credit does not apply to class I railroads or short-line railroads owned by a class I railroad or any of its subsidiaries.
No credit may be earned after January 1, 2036, and no credit may be claimed on tax returns filed for reporting periods
beginning on or after January 1, 2042.
PUBLIC UTILITY TAX CREDIT FOR RAILROAD MATERIAL RECYCLERS (section 7):
This section provides a PU tax credit for companies that recycle railroad materials if the company transfers to an eligible
taxpayer rail, ties, tie plates, joint bars, fasteners, switches, ballast, or other equipment or materials that are part of the rail
infrastructure to be installed on tracks used by class II and III railroads. The credit is equal to the fair market value of the
donated materials.
Materials must be given to a qualifying recipient without consideration. The department must provide in a rule a standard
for determining the fair market value of donated materials.
Credit earned in one calendar year and not claimed in that calendar year may be carried forward for five additional
calendar years.
This credit may not be earned for materials donated to short-line railroads owned by a class I railroad or any of its
subsidiaries.
The PU tax credit may be transferred to any person subject to PU tax. No credit transfer applications may be submitted for
materials donated after December 31, 2036. No new credits may be earned after January 1, 2037, and no credit may be
claimed on tax returns filed for reporting periods beginning on or after January 1, 2042.
EFFECTIVE DATE:
The retail sales and use tax exemptions take effect July 1, 2024.
The B&O and PU tax credits for railroad material recyclers take effect July 1, 2025.
The B&O and PU tax credits for short-line railroads take effect January 1, 2025.
II. B - Revenue Impact
ASSUMPTIONS:
- There are 25 short-line railroads that may qualify for the credits and exemptions in this proposal.
OFM Form FN (10/95)
Fiscal Note # S3942-1
Bill # S 3942
4
- Washington State Department of Transportation provides legislative grant and loan funding for freight rail investments
through a biennial call for projects. Current information on those programs assumes $8 million in grants and $5 million in
loans will be provided during the 2023-25 Biennium. The loans require a minimum 20% match.
- Short-line railroad expenditures in future biennia are similar to planned expenditures in the 2023-2025 biennium.
- Short-line railroads have over 1,400 miles of track in Washington.
- For this estimate, it is assumed that materials represent 50% of the total cost of track maintenance.
- For this estimate, it is assumed that track maintenance occurs annually.
- Track maintenance costs, on average, are significantly higher than $3,500 per mile of track; therefore, this estimate
assumes the B&O and PU tax credits for qualified short-line railroad maintenance expenditures will be limited to $3,500
per mile of track.
- Since no specific B&O tax exemption exists for sales of transferable B&O or PU tax credits, it is assumed that such sales
will qualify as taxable events under the B&O tax. It will be taxed at the service and other activities tax rate. Given that no
data is available to estimate the transfer or sale of these credits in Washington, the revenue impact to the state general
fund from any B&O taxes collected due to these sales is unknown.
- The impacts from the B&O and PU tax credits for railroad material recyclers are confidential, as those credits impact
fewer than three taxpayers. These tax credits result in additional negative revenue impacts not shown in this fiscal note.
- Sales tax growth mirrors the growth rate in the ERFC November 2023 forecast.
- The average local sales tax rate is 2.95%.
- The department receives the taxes from monthly taxpayers the month after the business collects the sales tax from the
consumer. Most local tax distributions occur the month after the department receives sales and use taxes that businesses
collect. This leads to a one-month delay in revenues for the state and a two-month delay in revenues for local
jurisdictions.
- The sales and use tax exemptions are effective July 1, 2024, and impact 11 months of state sales and use tax collections
in fiscal year 2025 and 10 months of local sales and use tax collections in fiscal year 2025.
- The B&O and PU tax credits for short-line railroads, as estimated, assume credit applications will be received on or after
January 1, 2025, for qualified expenditures in the previous calendar year. It is assumed the first credits will be approved
and used in March 2025, impacting three months of collections in fiscal year 2025.
- The B&O and PU tax credits for railroad material recyclers are effective July 1, 2025, and impact 11 months of
collections in fiscal year 2026.
DATA SOURCES:
- U.S. Surface Transportation Board
- TrainWeb.com
- American Society of Civil Engineers, Infrastructure Report Card
- U.S. Department of Transportation, Federal Railroad Administration
- Department of Transportation, Washington State Rail Plan 2019-2040
- Department of Transportation, Washington 2023-2025 Freight Rail Assistance Program/Freight Rail Investment Bank
project lists
- Assessment of State Support for Short Line Rail Infrastructure, Report to the Washington State Joint Transportation
Committee, December 2021
- Economic and Revenue Forecast Council, November 2023 forecast
- Department of Revenue, excise tax returns
REVENUE ESTIMATES:
This bill decreases state revenues by an estimated $1.9 million in the 11 months of impacted collections in fiscal year
2025, and by $7.4 million in fiscal year 2026, the first full year of impacted collections.
This bill also decreases local revenues by an estimated $59,000 in the 10 months of impacted collections in fiscal year
2025, and by $74,000 in fiscal year 2026, the first full year of impacted collections.
OFM Form FN (10/95)
Fiscal Note # S3942-1
Bill # S 3942
5
TOTAL REVENUE IMPACT:
State Government (cash basis, $000):
FY 2024 - $ 0
FY 2025 - ($ 1,940)
FY 2026 - ($ 7,360)
FY 2027 - ($ 7,370)
FY 2028 - ($ 7,370)
FY 2029 - ($ 7,380)
Local Government, if applicable (cash basis, $000):
FY 2024 - $ 0
FY 2025 - ($ 59)
FY 2026 - ($ 74)
FY 2027 - ($ 77)
FY 2028 - ($ 79)
FY 2029 - ($ 82)
II. C - Expenditure Impact
ASSUMPTIONS:
- This bill affects approximately 25 taxpayers.
- The annual tax performance report is not required. The tax preference performance statement (section 8) of this bill lists
the purpose as a general purpose as indicated in RCW 82.32.808 (2) (f).
FIRST YEAR COSTS:
The department will incur total costs of $284,400 in fiscal year 2024. These costs include:
Labor Costs - Time and effort equate to 1.06 FTE.
- Set up, program and test computer systems for multiple new credits. This includes a new credit ID and associated
return processing and system indicator codes, a new e-file worksheet, and modifications to reports and data files.
- Gather requirements, attend implementation meetings, document and test system changes due to new credits.
- Create a Special Notice and identify publications and information the department may need to create or update on the
department’s website.
Object Costs - $130,000.
- Computer system changes, including contract programming.
SECOND YEAR COSTS:
The department will incur total costs of $723,000 in fiscal year 2025. These costs include:
Labor Costs - Time and effort equate to 2.6 FTEs.
- Adopt one new administrative rule.
- Continue computer system testing, monitoring, and maintenance.
- Assist taxpayers with reporting questions and respond to inquiries via email, web message, and paper
correspondence.
- Process returns, verify credits taken, and process all associated work items, including issuing assessments for return
errors and underpayments.
- Create a Special Notice and identify publications and information the department may need to create or update on the
department’s website.
OFM Form FN (10/95)
Fiscal Note # S3942-1
Bill # S 3942
6
Object Costs - $389,900.
- Computer system changes, including contract programming.
ONGOING COSTS:
Ongoing costs for the 2025-27 biennium equal $189,500 and include similar activities described in the second-year costs.
Time and effort equate to 0.9 FTE.
Part III: Expenditure Detail
III. A - Expenditures by Object or Purpose:
Fiscal Year 2024 Fiscal Year 2025 2023-2025 Total 2025-27 Biennium 2027-29 Biennium
Salaries and Wages 98,100 213,100 311,200 123,800 95,400
Benefits 32,500 70,400 102,900 40,800 31,400
Personal Service Contracts 130,000 389,900 519,900
Supplies & Material 16,300 35,800 52,100 19,300 15,200
Office Equipment 7,500 14,600 22,100 5,600 4,400
Total 284,400 723,800 1,008,200 189,500 146,400
III. B - FTE Detail:
Job Classification Salary FY 2024 FTEs FY 2025 FTEs 2023 - 2025 Total 2025 - 2027 2027 - 2029
EMS BAND 4 131,684 .01 .01
EMS BAND 5 153,836 .01 .01
EXCISE TAX EX 3 64,092 .9 .45 .75 .6
IT B A-JOURNEY 91,968 .3 .8 .55 .15 .1
IT B A-SR/SPEC 101,376 .1 .1 .1
IT SYS ADM-JOURNEY 96,552 .4 .5 .45
MGMT ANALYST4 76,188 .01 .01
TAX POLICY SP 2 78,120 .18 .12 .15
TAX POLICY SP 3 88,416 .07 .12 .1
TAX POLICY SP 4 95,184 .01 .01
WMS BAND 2 98,456 .01 .01 .01
WMS BAND 3 111,992 .01 .01
Total 1.06 2.6 1.86 .9 .7
III. C - Expenditures by Program (optional):
Fiscal Year 2024 Fiscal Year 2025 2023-2025 Total 2025-27 Biennium 2027-29 Biennium
Total
Part IV: Capital Budget Impact
None.
Part V: New Rule Making Required
OFM Form FN (10/95)
Fiscal Note # S3942-1
Bill # S 3942
7
Should this legislation become law, the department will use the standard process to adopt WAC 458-20-XXX, a new rule
on railroad tax exemptions and credits. Persons affected by this rulemaking would include certain railroads.
OFM Form FN (10/95)
Fiscal Note # S3942-1
Bill # S 3942
8
Revenue Impact Detail
First Biennium Second Biennium Third Biennium
FUND SOURCE CODE 1st YEAR 2nd YEAR 3rd YEAR 4th YEAR 5th YEAR 6th YEAR
GF-State Retail Sales Tax 0101 (140,000) (160,000) (170,000) (170,000) (180,000)
GF-State Business and Occupation Tax 0105 (900,000) (3,600,000) (3,600,000) (3,600,000) (3,600,000)
GF-State Public Utilities Tax 0135 (900,000) (3,600,000) (3,600,000) (3,600,000) (3,600,000)
Total (1,940,000) (7,360,000) (7,370,000) (7,370,000) (7,380,000)
OTHER
Total
Net (1,940,000) (7,360,000) (7,370,000) (7,370,000) (7,380,000)
Revenue Impact - by Biennium
FUND SOURCE CODE 1st Biennium 2nd Biennium 3rd Biennium
GF-State Retail Sales Tax 0101 (140,000) (330,000) (350,000)
GF-State Business and Occupation Tax 0105 (900,000) (7,200,000) (7,200,000)
GF-State Public Utilities Tax 0135 (900,000) (7,200,000) (7,200,000)
Total (1,940,000) (14,730,000) (14,750,000)
OTHER
Total
Net (1,940,000) (14,730,000) (14,750,000)
OFM Form FN (10/95)
Fiscal Note # S3942-1
Bill # S 3942
9
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