HOW TO FUND AMERICA’S NEEDED PASSENGER-RAIL INFRASTRUCTURE: REPATRIATE THE “EMERGENCY” WARTIME TICKET TAX

a proposal by

James E. Coston
Managing Partner
Coston & Lichtman
Chicago

Member
Amtrak Reform Council

January 11, 2002

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As the debate over Amtrak’s future moves toward its climax, most of the parties agree on one thing: America’s railroad infrastructure is not adequate to carry the fast, frequent, modern trains that are essential if passenger trains are to help the nation solve its growing mobility problem. Thousands of miles of new rail infrastructure must be built.

Such an infrastructure will cost many billions of dollars–not as much as our Interstate highways, our federally financed airports and our air-traffic control system–but a large expense nevertheless. How will we pay for it?

Like most students of the problem, I believe that a ticket tax and trust fund is the way to go–eventually. User fees are the American way to finance transportation infrastructure, and Americans have long accepted this mechanism.

But I also recognize that although it is important to preach a ticket tax and trust fund, the current level of rail U.S. rail ridership–even with the growing number of rail commuters contributing–is too low to generate the dollars needed for an effective infrastructure program.

So I think we need another mechanism to “kick start” development of the high-speed corridors so that we can build ridership and revenues to a threshold beyond which the ticket tax alone will provide ample self-support. Or, to put it another way, we need a solid-fueled booster rocket to lift rail free of the gravitational pull of low ridership and place it in an orbit of popularity sufficiently high to enable user fees to maintain and build out the system.

It is this pre-user-fee “honeymoon,” not the user fee itself, which both our highways and our civil-aviation infrastructure relied upon until public use reached a level high enough to make user fees an effective funding source. It is the pre-user-fee honeymoon on which the ARC now must focus in justifying a federally financed passenger-rail infrastructure program. A user fee on rail passengers at this point would raise too little money to solve our rail-infrastructure problems– because there are so few riders on our obsolete rail system. Thus, selection of the proper “kickstart” or “booster-rocket” mechanism will be critical to winning public support for rail funding.

It is all too easy to forget amid all the pious talk about our “self-sufficient” highway and airway systems that prior to 1971 there was no airline ticket tax or Airport and Airway Trust fund and prior to 1956 there was no federal gasoline tax or Motor Fuel Trust Fund, yet both of these infrastructure systems got funded; from1946 until 1971 the nation’s commercial-airport network was essentially built out and the FAA’s command-and-control network put in place.

How? The federal government simply dispensed money from the General Fund to local communities for airport construction. Only after a decade-long conversion to jet technology did the airline industry reach critical mass in passengers so that users fees could start supporting infrastructure. Prior to 1956 there was no federal Motor Fuel Trust Fund, yet the highways got built and a mass market for intercity auto travel developed because the federal government primed the pump with revenues from the General Fund which the states then matched with their own revenues for road construction.

Even after federal user fees were established as the central pillar of highway financing with passage of the Interstate Highway Act in 1956, the federal government still had to subsidize highway construction. By 1958, two years after a federal tax on gasoline at the pump began stoking the Motor Fuel Trust Fund, the Interstate Highway construction program had used up all its Trust Fund revenues and had to be bailed out by Congress with a two-year suspension of its “pay-as-you-go” provision and a $4-billion cash infusion from the General Fund. And the civilaviation system continues to receive annual subsidies of nearly $8 billion from the General Fund to cover expenses that cannot be paid out of user fees alone. The ARC needs to remind Americans that a pre-ticket-tax funding solution must be found for rail just as it was found for air and highway. A ticket tax alone cannot do the job.

Some have proposed that “a rail-infrastructure bond program” be used to raise the necessary money. Let me explain why I differ on this issue.

First, bond money is not “free.” It must be repaid either from operating revenues or from additional taxes. If the taxpayers understand and accept this, fine, but often they do not and are deeply resentful when they are later presented with the bill for bond interest.

Second, there is a fairness issue here. Bonding was not used by the federal government to fund the civil-aviation or highway systems, and it seems less than fair to obligate rail passengers or federal taxpayers at large to pay interest to rail bond holders when no such burden was imposed in constructing the civil-aviation and highways systems. Historically, bonds have been issued by local and state governments to raise their share of matching funds for federally financed transportation infrastructure projects, but the federal portion itself, amounting to 80 per cent in the case of highways, was always raised from federal taxes.

In fact, when the Eisenhower administration in 1955 proposed a $20-billion bond issue to fund the Interstate highway program, the bill was savaged by Senate Finance Committee Chairman Harry Byrd of Virginia, who said, “Nothing has been proposed during my 22 years in the United States Senate that would do more to wreck our fiscal budget system...The result would be the end of honest bookkeeping.”

The nation’s media lined up with Sen. Byrd on the bond proposal. The Nashville Tennessean called it a “sham.” The Columbus Citizen called it “a gold-brick scheme...which would hike the debt without acknowledging it. The Cleveland Plain Dealer asked whether “one session of Congress would obligate succeeding sessions to continue any appropriation.” The administration’s bill never emerged from the Public Works Committee, and it was another year before an Interstate bill based on pay-as-you-go funding and a federal motor fuel tax passed both Houses.

How can the ARC successfully argue for a program to use tax money from the General Fund to support a rail-infrastructure development program?

I believe there is a way to do it, and, once again, the key to winning this form of funding is to present it not just as a transportation-development issue, but as a fairness issue.

The way to do this is to tell the nation that there already is a Rail Trust Fund, that it has never been used, and that the time has come to deploy it. It is a clean, simple funding source that does not require a complicated or controversial bonding agreement and need not introduce a commercial carrier such as Amtrak into the process of disbursing federal fund to state departments of transportation.

As part of the Revenue Act of 1942, Congress established a 15-percent wartime excise tax on common-carrier tickets for passenger transportation. The tax covered all intercity rail, bus and air tickets. However, because rail was the overwhelmingly predominant mode of overland passenger transportation at that time, the bulk of the receipts throughout the wartime emergency came from railroad passengers. As you know, rail ridership in the U.S. reached its all-time peak in 1946, and it was well into the 1950s before air transportation began to overtake rail. In 1954 the tax was reduced to 10 percent. It was finally abolished by Public Law 87-508 in 1962.

Unlike the federal motor-fuel tax, which was imposed by Congress in 1956 to fund construction of the Interstate highways, and unlike the 10-percent airline ticket tax, which took effect under the Airport and Airway Development Act in 1971 to expand airport capacity and fund the FAA’s Air Traffic Control system, the 1942 passenger ticket tax was not a user charge earmarked to upgrade or expand rail infrastructure. No trust fund was created to collect and disburse the proceeds, and Congress did not direct that they be used for any particular purpose. Instead, they were paid into the General Fund.

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Ironically, some of these taxes paid to the federal government by railroad passengers ended up in
the Federal Airport Act of 1946, which appropriated $520 million from the General Fund to help
local communities expand their airports to accommodate commercial airliners. It was this very
federal sponsorship of commercial aviation and highways that ultimately overwhelmed the
privately financed and chronically undercapitalized passenger service operated by the railroads.

In other words, taxes collected from railroad passengers were confiscated and used to fund infrastructure for rail’s competitors rather than to improve the infrastructure this nation needed to run faster, safer, more comfortable and more economically valuable passenger trains. Indeed, the purpose of the Act never was to improve passenger-rail infrastructure or service. The ticket tax was a purely confiscatory and sumptuary tax intended to discourage unnecessary civilian wartime travel and free up scarce coach and sleeping-car space for travel essential to the war effort. No effort was made to set the proceeds aside for re-investment in rail capability.

The 1942 rail-passenger excise tax succeeded all too well in discouraging rail travel. In fact, it succeeded twice: first, when the extra cost of rail travel drove potential travelers off the rail system, and later when the proceeds of the tax were used to finance modern air and highway infrastructure that made airline and auto travel a practical alternative to a rail system that could not secure the capital required to modernize.

The time now has come to right this historic wrong. It is time to take the revenue collected during the 20-year life of the 1942 “emergency” wartime rail passenger tax and “repatriate” it, with interest, to its rightful recipient, the nation’s obsolete and inadequate rail infrastructure. Congress must retroactively re-allocate the proceeds of the rail passenger ticket tax so that they can be invested in the rail infrastructure from which they were withheld for sixty years. It is time to turn a tax meant to discourage rail travel into a tax designed to encourage it.

According to the Annual Report of the Commissioner of Internal Revenue for Fiscal Years 1942 through 1962, the total amount of ticket taxes collected under the Act was $3.9 billion.

According to the Federal Reserve Bank of Chicago, the value of these receipts recalculated in 2001 dollars is just over $30 billion–nearly three times the dollars scheduled to be made available through the sale of bonds under S. 250, the High Speed Rail Investment Act.

Based on the Federal Reserve’s calculations that the money confiscated from U.S. travelers from1942 to 1962 has a current value of $30 billion, I urge the ARC propose as part of any restructuring plan that the federal government invest this $30 billion in bringing the nation’s long-neglected intercity rail infrastructure up to date. The format for making these investments should be as follows:

• The Congress shall establish a Rail Infrastructure Trust Fund.
• Control of the Trust Fund shall be vested with the Federal Railroad Administration or with a Federal Rail Infrastructure Administration to be created by the Congress.
• Monies equal to the current value of the 1942-1962 excise tax, $30 billion, shall be deployed as follows: $15 billion to be deposited in the Trust Fund; an additional $15 billion to be made available either for deposit in the Trust Fund or as tax credits for the Northeast Corridor.
• During the first year of the fund’s existence, approximately $2 billion of the Trust Fund shall be expended to retire the majority of Amtrak’s commercial debt. Approximately $200 million in annual savings from debt-service payments will enable the company to catch up on deferred locomotive and rolling-stock maintenance and to begin placing orders for additional equipment needed to protect projected service startups.
• At the same time, the U.S. Treasury shall forgive the debt accrued by Amtrak in upgrading the Northeast Corridor. In exchange for the forgiveness of this debt, including retirement of the preference shares issued by Amtrak to the Department of Transportation, the title to the NEC will pass to USDOT. Under the administration of FRA or FRIA and using either proceeds from the Trust Fund or the tax credits to drive private investment, the new owner of the NEC thereafter will capitalize, upgrade, improve and maintain this essential railroad property. Amtrak can be designated as the operator of the Corridor on a long-term basis, with DOT, the on-line commuter-rail authorities and the respective states forming a Governing Board which will establish an annual budget, set user fees, approve capital projects and control all commercial applications of the Corridor’s property and assets.
• In the second year, approximately $3 billion of the Trust Fund will be matched with monies raised by the states to fund improvements to DOT-designated high-speed rail corridors outside the NEC. Trust Fund monies will be matched with state funds in a ratio to be determined by Congress (current highway funding is 80/20 federal/state; the 1946 Federal Airport Act specified a 50/50 match between the federal government and local airport authorities).
• In the third year, $3 billion more will be invested in designated high-speed corridors outside the NEC. In addition, $2 billion will be made available to areas not designated as high-speed corridors in order to remove bottlenecks in the freight-railroad system that are restricting the movement of Amtrak’s non-corridor long-distance trains. These funds would cover projects similar to the Sheffield Flyover, a three-mile long double-track elevation that enables Amtrak trains and through freight trains to avoid congested junctions and yards in Kansas City. The improvement has cut almost 24 hours off the time to move some freight shipments through the Kansas City gateway. The same funds could be used to finance double-tracking, siding extensions, high-speed signaling and other capacity and safety improvements mutually beneficial to freight and passenger trains.

How will the buildout of the nation’s upgraded passenger-rail infrastructure continue as the volume of money remaining in the Trust Fund is reduced? As major new infrastructure improvements come on line, allowing passenger-train speed, safety, comfort, frequency and reliability to increase and the passenger-train experience to improve and mature, demand for train travel will increase substantially above the 22 million passengers per year carried by Amtrak today.

Once ridership reaches “critical mass,” it should be politically possible to reactivate the railpassenger ticket tax at a level of 10 per cent, the same as the current airline user charge, raising approximately $300 million per year for investment in infrastructure. It also is possible that the freight railroads, having seen the Trust Fund raise the capacity, safety and profitability of their own track, would agree to a user charge on freight shipments. Such a charge will go into effect shortly between Los Angles and Long Beach to retire loans and bonds that funded the $4.4 billion Alameda Corridor freight-infrastructure improvements. Although neither the highways, the waterways nor the airport/airway system is fully funded out of its user fees and all require various open as well as hidden subsidies, the existing success of America’s privately owned rail industry in operating a self-supporting system suggests that a modern rail system will come closer to self-sufficiency than any of its three infrastructure rivals.

Finally, I expect that once ridership and demand are clearly on the upswing and the Trust Fund’s investments have succeeded in relegitimizing rail travel in America, Congress will agree to pass a 1-cent-per-gallon motor-fuel tax to be paid into the Rail Trust Fund. The “Amtrak penny,” as it has been called, would go not to Amtrak but to the FRA or to the new infrastructure agency for disbursement to states and regional compacts holding FRA approval for rail infrastructure projects. Having seen rail become successful, motorists no longer would object to having a tiny sliver of their gasoline tax used to support rail improvements.

The same would be true of airline passengers, who are likely to agree to a modest diversion of their user charge to create track realignments and airport rail stations permitting high-speed passenger trains to act as feeder “flights” to hub airports.

The Passenger Rail Trust Fund legislation should have virtually universal appeal, so long as it is structured realistically to avoid any suggestion that it is simply “another Amtrak bailout.” If we do our homework, we should be able to win support from Amtrak, the Association of American Railroads, the American Short Line and Regional Railroad Association, the American Public Transit Association, the commuter-rail authorities, the governors and legislators of a majority of states, and the mayors, city councils and economic-development authorities in most of the cities likely to be served by an improved passenger-rail system. The rail unions, along with the construction unions and organized labor in general, and much of the nation’s real-estate development industry, also are likely to be supportive.

The time has come for rail travel to assume its logical station in the spectrum of American mobility options. This cannot happen unless rail infrastructure is quickly, massively developed to overcome more than a century of unbalanced public-sector investment in competing mobility technologies. It is incumbent on the Reform Council to submit a plan that is most likely to bring this about, and I think a “repatriation” of the punitive 1942-62 ticket tax represents the most practical and appealing way to go. I hope my fellow members of the Council will agree and will propose such a measure in our Final Report.