(erielack) Re: Taxes

[Gordon Davids <g.davids_@_verizon.net>]

Until the middle 1960's, New Jersey taxed railroad property at a disproportionally high rate.  The tax rates varied by municipality and county, but the property assessment and inventory was done by the state.

The railroads succeeded in Federal court in having that taxing process declared illegal, and New Jersey changed the tax system from a property tax to a franchise tax, administered by the state.  The franchise tax was based on a proportion of the railroad’s net revenue, determined by the ratio of the track miles in the state divided by the total track mileage of the railroad.  I think non-transportation property was still subject to an “ad veloram” tax, based on its assessed valuation.

EL had a negative net revenue until 1968, so there was no franchise tax levied until that year.  When the tax became due, the state records showed us owning about 25 miles less track in the state than EL was carrying on the ICC valuation records.  It was a real problem to reconcile the two, because the state and ICC segments didn’t coincide.  We found that there were physically ten miles less track on the Bergen County Railroad valuation section than we had on the valuation records, and the state actually had better records that we did.  There was some wailing and gnashing of teeth in Cleveland over adjusting the valuation accounts, but it was worth quite a bit of money to fix them, and I believe it happened.  We spent a good amount of time out on the New York Division measuring the length of sidings, crossovers and side tracks.  Anyway, for a few years at least, EL paid the franchise tax to New Jersey based on a profit.

Pennsylvania had long had a similar franchise tax on the “main stem” but not on sidings, yards and non-carrier property.  In my time on the D&H, around 1970, I had to calculate acreage and grading quantities in PA and divide them between Main Stem and Other to check on the relative value of taxable and non-taxable property.  That case illustrates an old railroad principle - When you can’t find anyone else to do it, call the Bridge and Building Department.  They can do anything.

During that time, and up to a few years ago, New York State counties, municipalities and school districts levied an ad veloram tax on railroad property.  The assessments were supposed to be based on market value, but that was not easy to determine because people didn’t establish a market by buying and selling individual turnouts, miles of track, and bridges.  So they taxed everything based on the cost of the last one built (replacement value) with the land taxed at the highest commercial property rates.  That system went back for more than 150 years.  New York cities and villages were known to have extended their borders to annex railroad property as soon as it was built, so they could collect taxes on it.

Around 1960, New York changed the tax law just a bit, so that property used EXCLUSIVELY for passenger service was no longer subject to property tax.  That helped the New York Central, but I don’t think it did much for the Erie Lackawanna.  I think New York has relaxed some of the property tax burden on railroads in the past few years, but I don't know how it works now.

This is mostly based on my memory from 40 years ago, so anyone with better details or documentation is welcome to comment or debunk.  The point, though, is that the huge property tax burden in New Jersey was gone before the EL bankruptcy, but all the money drained in past years was never recovered by the Corporation or the Estate.


Gordon Davids



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