The U.S. tax code has long been a playground for industrial favoritism. Every few years, lobbyists and legislators team up to extend or expand one credit or another, each justified as a way to “stimulate investment” or “preserve jobs.” The latest entry in this long-running saga is a bill to enlarge the Section 45G railroad track maintenance credit, a tax subsidy for short-line and regional railroads.
The proposal, modestly titled the Short Line Railroad Tax Credit Modernization Act, would raise the per-mile cap on the credit from $3,500 to $6,100 and index it for inflation. It would also expand eligibility to include track owned or leased as of Jan. 1, 2024, rather than the 2015 cutoff in current law. By my count, these changes would raise the program’s 10-year cost from roughly $0.3 billion under current law to about $3.3 billion, an increase of roughly $3 billion in new subsidies.
Proponents call this a modest, pro-infrastructure measure. In truth, it’s a textbook case of how Washington mistakes corporate welfare for economic policy.
The railroad credit: a “temporary” subsidy that never ends
When Congress first enacted Section 45G in 2004, the provision was meant to help small, privately owned “short-line” railroads maintain their aging tracks. The credit was pitched as temporary, capped at 50% of maintenance spending up to a fixed dollar amount per mile. Yet, like nearly every “temporary” incentive, it has become a permanent fixture of the code.
The 2021 Consolidated Appropriations Act made the credit permanent but reduced its rate from 50% to 40%. Treasury’s Tax Expenditure Reports show what that means in budget terms: The credit’s cost peaks around $170 million in the early 2020s before phasing down to $0 by 2032 under current law. The reason isn’t an official sunset; it’s that the pool of eligible track, defined as that owned as of 2015, is gradually being exhausted.
That natural fade-out should be an opportunity for reformers to let the credit quietly disappear. Instead, Congress is moving to reset the eligibility clock and dramatically raise the amount of the subsidy.
Subsidies don’t create investment—they reward it
Supporters argue that short-line railroads need federal help to maintain rural infrastructure and connect to the national freight network. But the data tell a different story.
According to the Bureau of Economic Analysis, private investment in the U.S. railroad industry totaled over $19 billion in 2024, up from $13 billion in 2020. While short-line and regional railroads account for roughly 30% of the nation’s track mileage, they handle a smaller share of total freight traffic, around 10% to 20% of carloads and tonnage. Applying that range to total private investment implies that short lines are responsible for approximately $2 to $4 billion in annual private capital spending. As the figure below demonstrates, even at the lower end of that range, private investment dwarfs the $100 to $200 million in annual federal support provided through the Section 45G tax credit.[1]
In other words, railroads are already maintaining and upgrading their systems without government subsidies. The credit doesn’t cause new investment; it merely gives extra money to railroads that would have made the investment anyway.
Economists call this the deadweight effect: when public money pays for private actions that would have occurred regardless. The result is a fiscal transfer with no social gain. For every dollar in revenue forgone, taxpayers get little more than a political press release about “supporting infrastructure.”
A bad precedent for tax policy
The deeper problem is not the railroad industry itself; it’s the precedent. Every special-interest carve-out invites another, as companies and trade associations realize they can extract preferential treatment by organizing politically. The tax code becomes a patchwork of privileges, and the principle of equal treatment under the law erodes.
If railroads deserve a subsidy for maintenance, why not trucking companies for road repairs? Why not barge operators for dredging waterways, or airlines for runway upkeep? Once the logic of targeted favoritism is accepted, there’s no limiting principle.
Moreover, subsidies distort competition. Large Class I railroads don’t receive the Section 45G credit, yet they must compete for freight traffic with smaller short lines that do. The playing field tilts, not because of efficiency or productivity, but because one group is better at lobbying Congress.
What real reform would look like
If policymakers genuinely want to promote investment, there’s a far simpler, more neutral approach: full expensing of all capital outlays. Allowing firms, railroads included, to immediately deduct the cost of expenses such as track replacement, bridge repairs and equipment purchases treats all industries equally and eliminates the need for targeted credits.
Full expensing doesn’t require Congress to pick winners or micromanage business models. It simply removes the tax bias against investment by letting costs be recognized when they’re incurred. That’s sound policy rooted in the principles of neutrality and simplicity—two virtues sorely missing from the current tax code.
The broader principle: End corporate welfare altogether
Whether it’s ethanol, semiconductors, electric vehicles or short-line railroads, the case against subsidies is the same. Government cannot allocate capital more wisely than markets can. Every dollar funneled into an industry through the tax code must first be taken from current taxpayers or borrowed from future ones.
Subsidies also breed dependency. Firms come to plan their finances around the expectation of government support, lobbying intensifies, and innovation is redirected from productive uses to rent-seeking. Over time, the private economy becomes an appendage of public policy rather than an independent engine of growth.
That’s not capitalism, it’s corporatism. And it’s a poor deal for everyone except the lobbyists who secure the carve-outs.
[1] These figures should be viewed as reasonable approximations rather than precise measures, since official Bureau of Economic Analysis and Surface Transportation Board data do not separately report short line investment. Nonetheless, the 10–20% range reflects the best available empirical proxies based on freight handled and industry-reported capital spending.
You had me at "Congress Should Stop Subsidizing..."