OLR Research Report

March 13, 2008




By: James J. Fazzalaro, Principal Analyst

You asked for an explanation of Connecticut's law granting tax exemptions for railroads in exchange for capital improvements they make to their systems and for any information on incentives for freight railroads given in other states.


The initial section of this report explains the Connecticut tax exemption for railroads that undertake approved preservation or improvement projects. The second section of the report briefly explains some of the rail freight incentive programs that exist in 11 other states (Illinois, Maine, Michigan, Minnesota, Mississippi, New Jersey, Ohio, Pennsylvania, Washington, Wisconsin, and Virginia). These programs typically provide grants, loans, or both, to eligible recipients, which in many cases include railroads and potential or current users of rail service, to initiate, preserve, improve, or expand services or facilities. Programs exist in other states as well.

In addition to this information, we are providing a link to an informative report recently done by the Federal Highway Administration on financing freight improvements. The report contains a great deal of information on federal and state mechanisms for both rail and non-rail freight transportation. It can be found at


Under Connecticut law, a passenger or freight railroad operating in the state may qualify for an exemption from the gross earnings taxes it owes to Connecticut in exchange for undertaking projects to preserve or improve its facilities (CGS 13b-226 et seq.) By November 1 annually, railroads seeking the tax exemption must submit to the transportation commissioner a list of the preservation and improvement projects they intend to undertake to qualify for the exemption. The commissioner must review the proposed projects, make any modifications to them he deems necessary, and issue a final list of tax exemption projects by December 31.

When establishing the tax exemption projects for a railroad, the commissioner must consider the:

1. existing and prospective financial ability of the railroad to comply with the projects;

2. tax exemption projects, if any, established for the railroad by any other state;

3. plans, if any, recommended for the railroad by any committee or other group of public officers here or in any other state; and

4. reports and recommendations, if any, proposed by the United States, any state, or any agency or commission relating to the railroad.

Tax exemption projects must include one or more of the following:

1. railroad track or facility improvement projects in Connecticut involving maintenance , rehabilitation, or construction of tracks, bridges, stations, or platforms or acquisition or rehabilitation of equipment used exclusively in Connecticut;

2. light density freight line preservation in Connecticut, where the revenue and variable cost of such lines create the potential for abandonment; or

3. intercity rail passenger service expansion in Connecticut.

The transportation commissioner must make periodic inspections to determine the degree of compliance with respect to the tax exemption projects and must report annually by October 1 to the governor and the legislative transportation and finance, revenue and bonding committees.

Each year, by March 1, the commissioner must certify to the governor the railroads that are in compliance with the program and eligible to receive the tax exemption. The commissioner must also submit a report on that date to the governor and the chairs of the Transportation Committee and the Finance, Revenue and Bonding Committee that describes the effect of the tax exemption provided during the preceding calendar year, the projects undertaken, and the degree of compliance by the participating railroads. He must also include (1) a summary of the financial condition of the participating railroads, (2) a list of all railroads not granted a tax exemption and the reasons for this, and (3) any recommended changes to the law.



There are two programs in Wisconsin. One is the Freight Railroad Preservation Program and the other is the Freight Rail Infrastructure Improvement Program (Wis. Stats., Sec. 85.08).

The Freight Railroad Preservation Program provides state grants for up to 80% of the cost to (1) purchase abandoned rail lines in an effort to continue freight service or preserve the opportunity for future rail service and (2) rehabilitate facilities, such as tracks or bridges, on publicly-owned rail lines. Eligible recipients can be a county, municipality, transit commission, railroad, or a current or potential user of rail freight service. For the current budget period (FY 2007-2009), a total of $22 million in bonding has been authorized by the legislature for use in this grant program. Since the program's beginning, more than $92 million in grants has been made.

The Freight Railroad Infrastructure Improvement Program was added in 1992. The loan program allows the state to encourage a broader range of improvements to the rail system, in particular those on privately owned lines. It also provides funding for other rail related projects such as loading facilities. Loans can cover up to the entire cots of projects that:

1. connect an industry to the national railroad system;

2. make improvements to enhance transportation efficiency, safety, and intermodal freight movement;

3. accomplish line rehabilitation; and

4. develop the economy.

To be eligible for a loan, a project must confer a public benefit and enhance economic development in the state. Program guidelines set parameters for doing a cost-benefit analysis for determining public benefit and for prioritizing projects for funding.

Loans are funded from repayment of prior loans. Over $79 million in loans have been made through this program since it began in 1992.


Michigan has two programs—the Michigan Rail Loan Assistance Program and the Freight Preservation and Economic Development Program. The Rail Loan Assistance Program involves no-interest loans for periods of up to 10 years. Loans may be made to railroads, local governments, economic development corporations, and current or potential users of freight railroad services. Loans are limited to a maximum of $1 million per project and per applicant. The loan recipient must provide a funding match of at least 10% of eligible project costs and this must be used before the state funds may be drawn upon. The rail loan fund operates as a revolving fund so that future loans are dependent on repayments.

Projects for receipt of rail assistance loans are evaluated for relative merit in conjunction with overall program goals. This process looks at a project's public benefits to safety and the economy. Typical factors that are considered are jobs created or retained, improved rail service to industrial and agricultural rail customers, elimination of grade crossings, and reductions in highway congestion. The Michigan Department of Transportation estimates that approximately $3.3 million is available in the current year under this program.

The Freight Preservation and Economic Development program provides either low-interest loans or grants. They can go to transportation companies, private companies or local governments. The loans or grants can cover up to 50% of the rail freight portion of a project when the rail improvement facilitates economic development.

Washington Rail Bank

The Washington Rail Bank was created by the legislature in 2007 to promote economic development through advancing rail freight activities. The program seeks to fund smaller capital rail projects that help improve freight movement. Railroads, port districts, rail districts, private companies, and local governments are eligible to apply for funds, which take the form of interest-free loans. A total of $2.5 million has been authorized for the rail bank in the current biennium.

A recipient can receive up to $250,000 for rail capital projects that must be matched by at least 20% of funds from other sources. Typical projects can include:

1. development of strategic multimodal consolidation centers;

2. purchase of rolling stock;

3. improvements or additions to terminals, yards, roadway buildings, fuel stations, railroad wharves, or docks;

4. communication operating system improvements or additions;

5. siding track, railroad grading, or tunnel bore improvements or modifications;

6. bridges, trestles, culverts, or other elevated or submerged structures.

Mississippi Local Government Revolving Loan Program

Mississippi law authorizes the Mississippi Development Authority to make low interest loans to counties or municipalities for the purpose of implementing freight rail service projects. These can involve the acquisition, construction, installation, operation, modification, or rehabilitation of any freight rail facilities. Loans can be made for up to a 15-year period at an interest rate that is one percent less than the Federal Reserve discount rate. Federal funds must be used to pay a minimum of five percent of the cost of each approved project. The development authority determines the maximum amount of any award. The law caps the maximum aggregate amount available to all counties at $8 million.


The Illinois Rail Freight Program provides assistance to communities, railroads, and shippers to preserve and improve rail freight service. The program was established in 1983. The program's primary purpose is to serve as a link between interested parties and to channel government funds to projects that achieve statewide economic development. It consists primarily of low-interest loans to finance rail improvements, but in some instances grants are provided. The program focuses on projects with the greatest potential for improving access to markets and maintaining transportation cost savings, and where state participation will leverage private investments to solve rail service problems. Projects are evaluated through a cost-benefit analysis. State funding for the program comes from general fund appropriations and through loan repayments.

Maine Industrial Rail Access Program

The purpose of the Maine Industrial Rail Access Program is to (1) stimulate economic and employment growth through generating new or expanded rail service, (2) preserve essential rail service where it is economically viable, (3) enhance intermodal transportation, and (4) preserve rail corridors for future transportation use. Private railroad companies, municipalities, counties, non-profit organizations, and private enterprises wanting to avail themselves of rail freight transportation are eligible to apply. Eligible projects fall into four categories—rehabilitation, new siding improvements, right-of-way acquisition, and intermodal facility construction. The program provides financial assistance for up to 50% of project costs.

The project evaluation process rates potential project recipients in these 10 categories: (1) job retention or creation, (2) new investment, (3) intermodal efficiencies, (4) size of private cost share, (5) anticipated decrease in air emissions, (6) anticipated decrease in highway maintenance costs, (7) anticipated decrease in highway congestion, (8) transportation and logistics cost savings, (9) improvements in rail service, and (10) benefit-cost ratio.

Annual funding levels are determined based on amounts specified in the publicly-approved general obligation bond act, which currently is about $1 million.

New Jersey

New Jersey provides funding for capital improvements that result in the continuation of economically viable rail freight services through its Rail Freight Assistance Program. Projects must show a positive cons-benefit-cost ratio taking into consideration factors like job creation and increased railroad revenue. Project sponsors are required to continue freight service on the improved area for at least five years after completion of the project. Projects can be for acquisition of rail lines or property, rehabilitation assistance, or facility construction. However, state financial assistance cannot be used to subsidize operating costs.

Projects funded through this program are included as part of the state's annual State Rail Plan. Grants for rehabilitation or construction projects are for 90% of costs with the remaining 10% matched from the railroad or other project sponsor. However, for state-owned lines, up to 100% of the rehabilitation costs can be covered.

Since 1994, more than $65 million has been provided for rail projects through the State Rail Plan. In 2008, the plan contains 17 new projects totaling more than $23.6 million.


The Pennsylvania Rail Freight Assistance program seeks to provide financial assistance for rail freight infrastructure improvement to (1) preserve essential rail freight service where economically feasible and (2) preserve or stimulate economic development through generation of new or expanded rail freight service. Funding is allocated from the state general fund. Matching grants can be made to railroad companies, transportation organizations, municipalities, municipal authorities, and users of rail freight infrastructure.

The maximum state funding for any project is $700,000 or no more than 70% of actual project cost, whichever is less. Projects can be for maintenance, construction, or a combination of both. However, funds cannot be used for acquiring land, land rights, buildings, or building materials to construct new buildings. The program is funded at approximately $8.5 million annually.

In addition to the rail freight assistance program, Pennsylvania provided another $20 million in 2007 for seven railroads and five businesses in its capital bonding program. Several of the grants provide local businesses with connections to rail lines. Others are for infrastructure rehabilitation.

Another program in Pennsylvania is its Infrastructure Bank, which was established in 1998. Loans are made at one-half the prime lending rate for a period of up to 10 years. Infrastructure Bank loans are currently being made at a 3% interest rate. Eligible borrowers can be municipalities, counties, transportation authorities, economic development agencies, non-profit organizations, and private corporations. All types of transportation infrastructure projects compete for these loans, not just rail.

Minnesota Rail Service Improvement Program

The Minnesota Rail Service Improvement Program draws its funding from both state general fund appropriations and general obligation bonding. It has five program components. The Rail Line Rehabilitation Program provides low- or no-interest loans to railroads to rehabilitate and preserve rail lines. When it completes the rehabilitation project, the railroad repays the state on a negotiated per-car basis or at a predetermined fixed rate. Loans are for up to 70% of project costs.

Other program components include:

1. the Rail Purchase Assistance Program, which helps regional rail authorities purchase rail lines if a financial analysis shows it can operate profitably, purchase and rehabilitation costs will not exceed benefits, and the authority can operate the line capably or can contract with a capable operator;

2. Rail User and Rail Carrier Loan guarantee Program, which helps shippers and carriers to obtain loans for rail rehabilitation and capital improvements by guaranteeing up to 90% of the loan;

3. Capital Improvement Loans, which lend rail users up to $200,000 or 100% of costs, whichever is less, to improve rail facilities, track connections, or loading, unloading, or transfer facilities; and

4. Rail Bank Program, which is used to acquire and preserve rail lines for future state, public, and commercial transportation needs.

The capital improvement loan portion of the program is used on a regular basis. The other program areas are used on an as-needed basis.

Ohio Rail Development Commission

The Ohio Rail Development Commission was established in 1994 as a component of the Ohio Department of Transportation. Its purpose is to provide assistance to companies for new rail and rail-related infrastructure with the goal of promoting retention and development of Ohio companies through the use of effective rail transportation. Companies who are considering adding rail to existing operations are also eligible for assistance. The commission works with the Ohio Department of Development and other public and private development related organizations to provide assistance to these companies.

Grant funding is generally limited to projects where significant job creation or retention (25 or more jobs) is involved. Grantees must commit to job creation or retention numbers and rail usage. Loan financing is available to qualified applicants even if jobs are not being created or retained. The standard loan package is a five year loan at an interest rate equal to two-thirds of the prime rate.


Virginia created a Rail Enhancement Fund in 2005. The fund provides a dedicated revenue stream for passenger and rail freight improvements at a level of $23 million annually. Use of the funds requires a minimum matching contribution of at least 30%, which must come from non-state sources such as railroads, local governments, or regional authorities. Projects are selected by the Commonwealth Transportation Board based upon the recommendations of the Rail Advisory Board. Funding can be used for creating additional track and capacity, track and infrastructure improvements, and improved intermodal facilities, and passenger rail initiatives.

Besides this fund, Virginia also has a Rail Industrial Access Program which it began in 1987. This program provides funds for new or improved access to a business for freight delivery. Businesses that want to participate must complete an application that is reviewed by the Economic Development Group of Virginia. The program provides for financial assistance to localities, businesses, or industries seeking to provide freight rail service between the actual site of an existing or proposed commercial facility and a rail carrier's tracks. The first $100,000 grant to any one project requires no match from the business. Any additional funding above that level requires a one-to-one match. The program typically receives funding of $1 million to $3 million annually. Unused funds do not carry over, but are used for highway industrial access projects instead.

Virginia's third program is its Rail Preservation Grant Program. This provides grants or loans for the purpose of preserving short line railroad operations in the state. Funds can be provided to local governments, authorities, agencies, transportation commissions, or non-public sector entities on a 70% state and 30% local matching basis. Funding to large railroads may be in loan form. However, funds cannot be used for general railroad operating expenses. Funding to short line railroads can be either loans or grants to purchase or refinance operating railway properties.