Senate Bill Report — 2ESHB 1371

Summary

A Senate Bill Report on 2ESHB 1371, an act relating to government incentives for improving freight railroad infrastructure, as of February 14, 2024, prepared by non-partisan legislative staff. The report notes the bill passed the House 95-0 and records a Senate Committee on Business, Financial Services, Gaming & Trade majority report of do pass as amended with referral to Ways & Means. Background sections describe railroad classifications, short line rail in Washington and the relevant state taxes. The bill summary describes B&O tax and public utility tax credits for class II and class III railroad maintenance and modernization, limited to $1 million per taxpayer and $15 million annually for some costs, a credit for donated rail materials, and a sales and use tax exemption for track maintenance materials. It closes with staff summaries of supportive public testimony.

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                            SENATE BILL REPORT
                                2ESHB 1371

                                     As of February 14, 2024

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

Brief Description: Providing incentives to improve freight railroad infrastructure.

Sponsors: House Committee on Finance (originally sponsored by Representatives Barkis,
    Leavitt, Orcutt, Fey, Barnard, Chapman, Low, Connors, Goehner, Chambers, Chandler,
    Couture, Griffey, Hutchins, Robertson, Volz, Walsh, Christian, Doglio, Schmick and
    Gregerson).

Brief History: Passed House: 2/8/24, 95-0.
     Committee Activity:


                                     Brief Summary of Bill
           • Creates various business and occupation, retail sales and use, and public
             utility tax exemptions and credits for donated materials, maintenance,
             modernization, and new construction of short line railroad tracks.


SENATE COMMITTEE ON BUSINESS, FINANCIAL SERVICES, GAMING & TRADE

     Majority Report: Do pass as amended and be referred to Committee on Ways & Means.
         Signed by Senators Stanford, Chair; Frame, Vice Chair; Dozier, Ranking Member;
     Boehnke, Gildon, Lovick, MacEwen and Mullet.

     Minority Report: That it be referred without recommendation.
        Signed by Senator Hasegawa.

     Staff: Alia Kennedy (786-7405)

SENATE COMMITTEE ON WAYS & MEANS




     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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     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 railroads:
        • have an annual operating revenue of more than $943.9 million; and
        • are large operators that cover significant portions of the country.

     Class I railroads operating in Washington include Burlington Northern and Santa Fe—1400
     miles, 44 percent of the rail system—and Union Pacific —500 miles, 16 percent.

     Class II railroads:
        • have an annual operating revenue between $42.4 and $943.9 million; and
        • are typically regional midsize carriers.

     There is one class II railroad operating in Washington which is located at the Spokane
     interchange.

     Class III railroads, also known as short lines:
        • have an annual operating revenue less than $42.4 million;
        • are small and regional, typically move agricultural products; and
        • are an average of one to 150 miles in length.

     There are 27 short line railroads operating in Washington with over 1400 miles of track,
     which constitute approximately 40 percent of the rail system. Some railroads of this class
     operating in Washington are:
        • Port of Chehalis Rail—one 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 operations. 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-


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     23 biennium for four freight rail improvement preservation projects that benefit short lines.
     The 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 $8.73 million is available
     for loans in 2023-25 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. During the 2023-25
     biennium, requests for grants and loans in both programs 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. 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
     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 1.926 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 to evaluate the efficacy of the tax
     preference. 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: Tax Credits. Credits against the B&O tax or PUT are allowed for
     certain costs related to railroad maintenance and modernization.


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     Class II and Class III Railroads. Class II and class III railroads, and other eligible
     taxpayers, are allowed a credit for expenses incurred on railroad construction,
     enhancements, or maintenance. The credit is equal to:
         • 50 percent of the costs for short line railroad maintenance, not to exceed an amount
           equal to $3,500 multiplied by the number of miles of railroad track owned or leased
           in the state by the eligible taxpayer as of the close of the calendar year;
         • 50 percent of the cost for new rail development; and
         • 50 percent of the cost for railroad modernization and rehabilitation.

     The credit for costs related to new rail development and railroad modernization and
     rehabilitation may not exceed $1 million per taxpayer each calendar year, and is limited to
     an annual total credit amount of $15 million each calendar year.

     Credits may not be earned on expenditures used to generate a federal tax credit or
     expenditures funded by a state or federal grant.

     Eligible taxpayers include:
         • railroads owned by a port, city, or county in the state of Washington; or
         • an 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 of Washington.

     No credit may be earned on or after January 1, 2036, and all credits must be claimed no
     later than January 1, 2042.

     Donated Materials. A company that recycles railroad material is allowed a credit equal to
     the fair market value of certain railroad materials donated to and used by a class II or class
     III railroad.

     Eligible donated materials include rail, ties, tie plates, joint bars, fasteners, switches, ballast,
     or other equipment that are part of the rail infrastructure it has removed from use on the
     main railroad line to be installed on tracks used by class II and class III railroads.

     Department of Revenue must provide in rule a standard for determining the fair market
     value of donated materials.

     Credits for donated materials may not be earned for donations to short line railroads owned
     by a class I railroad or any of its subsidiaries.

     No credit may be earned on or after January 1, 2037, and all credits must be claimed no
     later than January 1, 2042.

     Other Provisions. Unused credits may be carried forward and claimed in against subsequent
     tax liability for a period of five years, starting the year immediately following the year in


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     which the credit was initially earned. Taxpayers may transfer all or a portion of the unused
     credits to any taxpayer at any time for which the credit is eligible to be claimed. No credits
     may be transferred more than one time.

     Retail Sales and Use Tax Exemption. The retail sales and use tax does not apply to sales of
     materials required for track maintenance when purchased 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 Washington; or
        • any owner or lessee of a rail siding, industrial spur, or industry track located on or
           adjacent to a class II or class III railroad in Washington.

     The exemption may not be used by class I railroads or short line railroads owned by a class
     I railroad or any of its subsidiaries.

     The tax exemption expires January 1, 2036.

     Tax Preference Performance Statement. The bill includes a tax preference performance
     statement that states it is the Legislature’s specific public policy to promote economic
     development and reduce impacts of freight transportation on roads and the environment.

     Appropriation: None.

     Fiscal Note: Available.

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

     Effective Date: The bill contains several effective dates. Please refer to the bill.

     Staff Summary of Public Testimony on Engrossed Substitute House Bill (Business,
     Financial Services, Gaming & Trade) (Regular Session 2023): The committee
     recommended a different version of the bill than what was heard. PRO: Port districts rely
     heavily on short line railroads. Tax credits like those contained in this bill are necessary to
     address the underfunding of short line railroads. This bill is necessary to enable clean
     energy development in this state. The modernization efforts in this bill improve rail safety
     and efficiency. It is in the state's best interest to have a viable rail infrastructure. Many other
     states provide short line tax incentives. Washington has an extensive rail service and
     continues to invest in the industry. This bill is meant to target the class II and class III
     railroads and help those railroads make critical infrastructure improvements. Short line
     railroads are essential to keeping supply chains moving. The state should have a balanced
     transportation policy and provide adequate revenue to ensure it is flexible, energy efficient,
     and safe. Railroads have been largely ignored in the state's transportation analysis and
     funding. The tax credits and exemptions in this bill are incentives to improving the state's
     rail system and will encourage the recycling of rail materials. This bill provides a financing
     mechanism for expanding economic development and creating the capacity to make


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     statewide safety improvements. The bill will have a positive impact on the entire state but is
     particularly impactful to more rural areas.

     Persons Testifying (Business, Financial Services, Gaming & Trade): PRO:
     Representative Andrew Barkis, Prime Sponsor; Cynthia Stewart, League of Women Voters
     of WA; Ross Lane, Puget Sound & Pacific Railroad; Amber Carter, Portland Vancouver
     Junction Railroad; Justin Bentaas, Mickelson and Company; Chris Herman, Washington
     Public Ports Association.

     Persons Signed In To Testify But Not Testifying (Business, Financial Services,
     Gaming & Trade): No one.

     Staff Summary of Public Testimony on Bill as Amended by Business, Financial
     Services, Gaming & Trade (Ways & Means) (Regular Session 2023): PRO: A quarter
     of short line track is on steel that does not meet the necessary weight standards.
     Modernizing short line railroads is necessary to ensuring those railroads last for another
     hundred years. Investing in short line railroads improves safety and reduces carbon
     emissions and allows for the reusing and recycling of railroad materials. Short line railroads
     are essential to the function of port districts. This bill supports the state's clean energy siting
     goals and helps expand transportation access to future sites. The bill helps small railroads
     make necessary improvements, as well as increases safety and capacity. Short line railroads
     play a key role in moving goods across the state and country. Short line railroads help
     reduce greenhouse gas emissions associated with freight transportation. This bill is about
     economic development and accelerating the short line rail infrastructure in Washington. The
     tax incentives have been narrowed to create good policy while maintaining a meaningful
     economic benefit for rail development.

     Persons Testifying (Ways & Means): PRO: Ross Lane, Puget Sound & Pacific Railroad;
     Amber Carter, Portland Vancouver Junction Railroad; Ryan Pidde, Mickelson & Company,
     LLC; Jeff Van Schaick, Washington Eastern Railroad; Chris Herman, Washington Public
     Ports Association.

     Persons Signed In To Testify But Not Testifying (Ways & Means): No one.




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