How Railroad Designation Reduces Tax Liability
Local Assessment
In most cases, property owners have their real estate taxes managed by a single local assessor. This happens because their property is located entirely within one specific jurisdiction, typically governed by a city, township, or county. The responsibility for determining the value of their property for tax purposes falls solely within the authority of this local assessor.
This type of tax valuation process is known as a Local Assessment. The assessor conducts evaluations of properties within their jurisdiction to assign a value, which is then used to calculate property taxes. These assessments ensure that property owners contribute fairly to the local tax base, which helps fund public services such as schools, infrastructure, and emergency services.
Central Assessment
There are however several types of property which are so large that they stretch across numerous Counties and States. Some examples include:
- Railroads
- Oil and Gas
- Telecommunications
- Airlines
- Mining Operations
Determining a Unit Assessment for the Network
Because these properties often span multiple jurisdictions, it is virtually impossible for any single local assessor to accurately determine the value of the portion within their jurisdiction. The value of each part of the property often exceeds just the land, buildings, and materials, as it is interconnected with the rest of the property. Historically, a State Department of Revenue has always been the central authority responsible for determining the unit value of the entire property across all jurisdictions. It is then the responsibility of each state through which the property passes to determine the value of their portion of the unit value and to provide each local assessor with their pro-rata share of the total value.
Central Assessment: The Advantages for Railroad Operating Property
For certain industries, being assessed centrally as part of a larger unit is a significant disadvantage. The telecommunications industry, for instance, employs teams of lawyers to avoid the indicia that necessitate central assessment. By contrast, for the rail industry, central assessment is highly advantageous.
In the 1970s, when rail lines struggled to compete with trucking, the federal government intervened to provide their land and assets with favorable tax treatment. It was evident that maintaining or expanding railroad lines required massive investments in real estate and materials. Conversely, a trucking company could start with just a few trucks and minimal infrastructure. Reduced tax liability played a crucial role in stabilizing the struggling rail industry—but the railroads did even more.
You May Own A Railroad and Not Even Know It!
Over the next 50 years, to maximize shareholder profits, the Class I rail lines—BNSF, CSX, Union Pacific, and others—sold off various facilities across their networks that were expensive to maintain. What the new owners of these facilities may not realize, however, is that with just a quarter-mile of track, a few switches, and a track mobile, they also qualify as Railroad Operating Property under the U.S. Code. These Class III Railroads are entitled to the same favorable tax treatment as their larger Class I counterparts. For most rail-served industrial properties, the shift from local to central assessment results in a tax liability reduction of between 50% and 75%.
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