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Unrealistic depreciation provided less than one-third of the cost of the new car. After all, these cars were necessary merely to stay in business. The volume of our traffic was less in 1956 than it was in 1945. Yet depreciation failed to cover the two-thirds of the cost of staying in the business of hauling freight in freight train cars on our railroads. This deficiency of depreciation falls upon the railroad industry, with its huge investment in physical plant, with special severity. The problem is intensified by the comparatively low rates of return for o carriers even in times marked by prosperity on other segments of the economy. The railroads are struggling against mortality tables of the past so far as depreciation of plant and equipment is concerned. Terms of 40, 50, and up to 100 years are not uncommon in determining the service life of roadway structures and lives up to 35 years for determining o of equipment. These long terms mean very low annual depreciation rates and unnecessarily long periods over which railroads’ investment in plant and equipment can recovered, The railroads went through the depression thirties with very little modernization and replacement expenditures. Then, the period of World War II was one of scarcity of manpower and allocated materials when many needed improvements were practically impossible of accomplishment; The postwar period of high costs, high taxes and low earnings, has found the industry without the financial ability to do all that it should in the way of replacing obsolete facilities. Thus, we have had a long period of time in which many old facilities have been continued in service where they would have been replaced long since under more, propitious conditions. The taxing authorities look at these long lives of service without regard to obsolescence and require their use in determining current depreciation rates, not only on the old facilities, but they apply the low depreciation rates on current expenditures for new facilities. "The o authorities in effect have said, because you have been poor and were not able to replace old facilities, we are going to adjust our depreciation rates and your financial ability so as to make you eep them 85 years or 100 years, as the case may be. In a sense, taxing policies are responsible for perpetuating outmoded and ancient facilities, sometimes at the expense of high maintenance cost 8, In other words, if the taxpayer must use the extremely long lives as the only way in which he can write off his investments, he does not have the wherewithal nor the inclination to make earlier replacemonth, This situation is somewhat peculiar to the railroad industry because of historical conditions. The plant and facilities of other transportation have relatively short lives on depreciable assets. The construction reserve would help in remedying this. It would enable management to plan ahead and undertake desirable changes in existing property and additions and betterments that are necessary to meet the transportation challenge faced by the railroad industry. If given a construction reserve, I am confident the industry, at
least that portion of it having taxable incomes, would do much more
because of the deteriorating situation with respect to earnings after taxes.
These include new freight-house facilities at Kansas City and Los Angeles, together estimated to cost approximately $8 million.
A desirable line change out in Arizona that would call for an outlay in the range of $12 million.
Proposed yard and freight terminal facilities at points in Texas, New Mexico, Kansas, and California, aggregating about $16 million.
And, of course, the same thinking would apply not only on the Santa Fe, but on railroads, generally, with reference to carrying out an enlarged program of freight-car acquisitions.
In my opinion, there is no subsidy or Government gift at all attached to the construction-reserve proposal. No more than the cost of the property—less salvage-can ever be recovered through depreciation charges. The actual cost is simply recovered sooner.
We speak of costs being recovered. Actually, that is a term that needs explanation. The so-called recovery is represented by a charge against income. There is no forgiveness or recovery of costs from the Government.
Depreciation, however timed, is an expense or a cost of doing business. It represents the annual estimate of value used up by wear and tear and obsolescence of property devoted to and used in the business. It is just as much a cost of conducting a business and just as much a deductible expense as wages paid to the crew that handles the equipment. But each dollar of depreciation, just like each dollar of wages, properly reduces the Federal income tax by 52 cents.
The railroads are not asking to take any more of a deduction than the amount they actually spend. There is no argument at all as to the amount of the deduction or the legitimacy of it.
The question relates simply to the period of time in which the taxpayer is allowed to take it. What he takes now, he cannot get later,
What you may do about changing the timing by adoption of the construction reserve will neither increase nor decrease the amounts allowable for tax purposes. Certainly, there will be no long-term loss of tax revenue to the Government. Quite likely, there wilĩ be no immediate loss or sharp decline in tax revenue.
There may even be an immediate increase in tax receipts, as, conceivably, the adoption of the construction reserve could so stimulate capital expenditures as to put taxable income in the hands of builders and suppliers of railroad items and their employees right down to the source of raw materials to such an extent that the Federal Treasury would realize greater net tax receipts.
We have in the railroads an industry that is vitally essential to the economy and defense, which is desperately struggling against rigid regulation and stiff inflation, and earnestly pleading for a chance to become healthy and modern again.
It is asking no gift of the taxpayers' money. It is asking, simply: Won't you please remedy an enforced and continuing handicap upon our ability to improve our plant and efficiency so we can provide a better service to the public?
This can be done by the construction reserve, which amount to nothing more than a change in the timing of admittedly legitimate deductions, as any amounts used from the reserve fund would reduce
the basis for determining gain or loss and for depreciation, for the
powers over intrastate rates in proceedings under section 13. The need for such clarification stems from the recent decisions of the Supreme Court of the United States in Chicago, Milwaukee, St. Paul and Pacific Railroad Company v. State of Illinois (78 Sup. Ct. 304), decided January 13, 1958, and Public Service Commission of Utah et al. v. United States et al., decided May 19, 1958.
Attorneys who have studied these decisions are fearful that they may be construed as preventing relief by the Interstate Commerce Commission from intrastate rates which discriminate against and unduly burden interstate commerce, unless the overall results of the railroads entire intrastate operation on all traffic, both freight and passenger, are shown to produce such a discrimination or burden, and that they may otherwise greatly add to the burden as well as to the delays in obtaining relief from unduly low intrastate rates.
In other words, it would not be sufficient to show that rates on a substantial part of a railroad's intrastate traffic were so low as to produce an out-of-pocket loss; the Commission could not grant relief except on a showing of the total results of the railroad's entire intrastate operations covering all types of traffic.
Such a policy would not only impose an almost impossible burden of proof because of the impracticability of segregating the expenses of intrastate and interstate operations, but it is wrong in principle to expect operations to show a loss before relief is granted.
There is, therefore, a definite need for the amendment proposed in section 3 to prevent the decisions in the Milwaukee case and the Utah case from being interpreted in such a way as to produce this result.
This proposal for a larger Federal role in general railroad-rate adjustments is in no sense novel. The Congress has assumed in the Railway Labor Act exclusive jurisdiction over the labor relations of the railroads.
The wage adjustments made under that statute form the largest single element of the increased costs, requiring rate adjustments.
Likewise, in the Federal Employers' Liability Act, the Congress has, for most practical purposes, preempted the field of the liability of the railroads for personal injuries of their employees.
The same is true of the Railroad Retirement Act and the Railroad Unemployment Insurance Act.
The Safety Appliance Act, and related statutes, as well as the Hours of Service Act, occupy practically all of their respective fields.
Mr. ROBERTS. Does that conclude your statement, Mr. Marsh?
Mr. ROBERTS. Speaking for myself, you have certainly enlightened me on the situation with reference to the deficiency in depreciation rates. I can see where that would certainly be a tremendous handicap to the industry, as far as planning and as far as trying to replace existing equipment is concerned.
Now, in your annual report for 1957, you speak of the inflationary effect on your net income under the ICC accounting requirements as to depreciation of facilities covered by 5-year tax amortization certificates, and state for 1957, this amounted to $91/2 million for Santa Fe or 39 cents a share of common stock.
Is it your feeling that existing requirements have been proper or adequate to permit you correctly to state the amount of your annual income?