An Economic Analysis of the U.S. Wooden Railway Tie Industry

2018 Economic Impact Studies

In Partnership with

An Economic Analysis of the U.S.

Wooden Railway Tie Industry

A Report Prepared for the Railway Tie Association

October 22, 2018

An Economic Analysis of the U.S.

Wooden Railway Tie Industry

For more information about the report, please contact: Chad Moutray, Ph.D., CBE NAM Chief Economist and Director Center for Manufacturing Research (202) 637-3148 [email protected]

The Center for Manufacturing Research in Partnership with: Inforum www.inforum.umd.edu

Prepared for: Railway Tie Association 115 Commerce Drive, Suite C Fayetteville, GA 30214

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An Economic Analysis of the U.S. Wooden Railway Tie Industry

Table of Contents

Abbreviations ...... iii List of Tables ...... iv List of Figures ...... iv Executive Summary ...... 1 1. Introduction ...... 5 2. Industry Overview ...... 6 2.1 Output ...... 6 2.2 Employment...... 9 2.3 Value Added ...... 10 2.4 Labor Compensation ...... 12 3. National Economic Impact Analysis ...... 14 3.1 Upstream Analysis ...... 14 3.2 Downstream Analysis ...... 17 4. State-Level Economic Impact Analysis ...... 20 4.1 Upstream Output Impacts ...... 21 4.2 Upstream Employment Impacts ...... 22 4.3 Upstream Value Added Impacts ...... 23 4.4 Upstream Labor Income Impacts ...... 24 4.5 Downstream Output Impacts ...... 25 4.6 Downstream Employment Impacts ...... 26 4.7 Downstream Value Added Impacts ...... 27 4.8 Downstream Labor Income Impacts ...... 28 5. Summary and Main Findings ...... 29 References ...... 31 Appendix A – Data Sources and Methodology ...... A-1 A.1 Data Sources ...... A-1 A.2 Methodology for the National Economic Impact Analysis ...... A-3 A.3 Methodology for the State-Level Analysis...... A-4

ii An Economic Analysis of the U.S. Wooden Railway Tie Industry

Abbreviations

BEA Bureau of Economic Analysis BLS Bureau of Labor Statistics CEW Census of Employment and Wages EC Economic Census GDP Gross Domestic Product INFORUM Interindustry Forecasting at the University of Maryland IO Input-Output IP Intellectual Property NAICS North American Industry Classification System NAM National Association of Manufacturers RTA Railway Tie Association VA Value Added

Inforum iii

An Economic Analysis of the U.S. Wooden Railway Tie Industry

List of Tables

Table E.1. Summary of Upstream Analysis ...... 3 Table E.2. Summary of Downstream Analysis ...... 3 Table E.3. Combined Summary ...... 3 Table E.4. Top Upstream Output Effects by State ...... 4 Table E.5. Top Upstream Employment Effects by State ...... 4 Table 1. Output ...... 7 Table 2. Employment by Industry Segment ...... 10 Table 3. Value Added ...... 11 Table 4. Labor Compensation ...... 13 Table 5. Top Upstream Suppliers to Sawmills and Wood Preservation (NAICS 3211) in 2016 ...... 15 Table 6. Summary of Upstream Analysis ...... 15 Table 7. Sawmills and Wood Preservation (NAICS 32111) Sales to Other Sectors ...... 17 Table 8. Summary of Downstream Analysis ...... 18 Table 9. Combined Summary ...... 19 Table 10. Upstream Output Impacts by State...... 21 Table 11. Upstream Employment Impacts by State ...... 22 Table 12. Upstream Value Added Impacts by State ...... 23 Table 13. Upstream Labor Income Impacts by State ...... 24 Table 14. Downstream Output Impacts by State ...... 25 Table 15. Downstream Employment Impacts by State ...... 26 Table 16. Downstream Value Added Impacts by State ...... 27 Table 17. Downstream Labor Income Impacts by State ...... 28 Table A.1. Main Data Sources Used for this Study ...... A-1 Table A.2. Illustration of NAICS 2012 ...... A-2

List of Figures

Figure E.1. Output ...... 1 Figure E.2. Employment ...... 2 Figure 1. Output ...... 7 Figure 2. Distribution of Output in 2016, RTA Product Scope ...... 8 Figure 3. Employment ...... 9 Figure 4. Value Added ...... 11 Figure 5. Labor Compensation ...... 13 Figure 6. Upstream Analysis ...... 16 Figure 7. Downstream Analysis ...... 19 Figure 8. RTA State Focus ...... 20

iv An Economic Analysis of the U.S. Wooden Railway Tie Industry

Executive Summary

This report presents a current snapshot and summary of the recent economic evolution of the domestic wooden railway tie industry. The analysis provides information on the size, scope, and growth of the industry as a whole, along with its contributions to the U.S. economy. The industry segments analyzed in this study include portions of: • Sawmills (NAICS 321113) • Wood Preservation (NAICS 321114)

Output of RTA-related industries expanded steadily during the mid-to-late 2000s. Growth continued in the early 2010s, but endured a steep decline in 2014. Following a rally in 2015, a small dip in 2016 left output at $2.4 billion. Between 2002 and 2016, RTA-related output grew at an average annual rate of 1.3 percent per year.

Figure E.1. Output Units: Millions of 2016 Dollars

3,000

2,677

2,673

2,576

2,498

2,463 2,448

2,500 2,416

2,321

2,303

2,231

2,027

2,019 1,991

2,000 1,959 1,830

1,500 Million 2016$ Million

1,000

500

0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Employment at wooden railway tie manufacturers fluctuated considerably between 2002 and 2016. Employment declined mildly in 2012 and 2013 before dropping sharply in 2014. Performance has been mixed in the last two years, with job totals rising 7.6 percent in 2015 and declining 6.8 percent in 2016. The number of persons employed at RTA- related industries was approximately 5,060 in 2016. While job growth has been weak in recent years, it is important to note that productivity gains allow the industry to produce more output with less labor.

An Economic Analysis of the U.S. Wooden Railway Tie Industry

Figure E.2. Employment Units: Jobs

7,000

6,285

6,250

6,074

6,013 5,905

6,000 5,864

5,624

5,418

5,386

5,278

5,087

5,062

5,023 5,007 5,000 4,959

4,000 Employees

3,000

2,000

1,000

0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

The impact of the wooden railway tie industry extends beyond the direct economic impacts as measured by the variables described above. In this analysis, the domestic production of wooden railway ties is our starting point. This concept is called the direct output. This activity does not exist in isolation. Instead, it generates demand from supplier industries. These supplier industries in turn generate demand for their supplier industries. All of the output generated beyond the direct output is called the indirect output. In addition to the direct and indirect impacts, we calculate induced output. This represents the additional demand generated by the disposable income earned in the industry (this may be both wage income and capital income).

2 An Economic Analysis of the U.S. Wooden Railway Tie Industry

Associated with the output at each round of impact is the employment required in that sector to produce that output, as well as the value added or income earned. The “upstream” impacts of supplier industries are displayed below in Table E.1. Total jobs within the industry (5,062) plus upstream suppliers (13,780) plus induced jobs (10,805) came to a total of 29,647 in 2016.

Table E.1. Summary of Upstream Analysis Units Indicated

Output Employment Value Added Labor Income (Million $) (Persons) (Million $) (Million $) Direct 2,416 5,062 614 285 Indirect 2,811 13,780 1,351 883 Induced 1,752 10,805 978 551 Total 6,979 29,647 2,943 1,719

In addition to these upstream impacts, economic activity is generated in wholesale and retail trade (“downstream”) industries that distribute wooden railway ties. These are displayed in Table E.2. Total downstream jobs, including direct, indirect, and induced, came to 3,750 in 2016. The combined impacts are seen in Table E.3, with total upstream and downstream employment amounting to 33,397.

Table E.2. Summary of Downstream Analysis Units Indicated

Output Employment Value Added Labor Income (Million $) (Persons) (Million $) (Million $) Direct 310 1,304 207 107 Indirect 159 912 93 58 Induced 249 1,533 139 78 Total 718 3,750 439 243

Table E.3. Combined Summary Units Indicated Output Employment Value Added Labor Income (Million $) (Persons) (Million $) (Million $) Upstream 6,979 29,647 2,943 1,719 Downstream 718 3,750 439 243 Total 7,698 33,397 3,382 1,962

The national level economic impacts can be seen as the sum of economic impacts at the state level. National level direct production, employment, value added, and earnings have been distributed to the state level using employment shares taken from the BLS Census of Employment and Wages (CEW), for both the upstream and the downstream analysis.

In order to calculate the indirect and induced impacts of production, we use IMPLAN’s detailed databases and economic models. IMPLAN is often used by business professionals, researchers, and elected officials to assess potential local economic impacts of various projects. We have used IMPLAN to calculate direct, indirect, and induced impacts for output, employment (jobs), total value added, and labor income.

RTA staff have identified twenty-five states of interest. The top states in terms of upstream output and employment are summarized in Tables E.4 and E.5.

An Economic Analysis of the U.S. Wooden Railway Tie Industry

Table E.4. Top Upstream Output Effects by State Units Million $

Output (Million $) Direct Indirect Induced Total Oregon 200.3 130.8 55.4 386.5 Georgia 144.8 95.7 46.8 287.3 Alabama 157.5 89.6 37.6 284.7

Table E.5. Top Upstream Employment Effects by State Units Jobs

Employment (Number of Jobs) State Direct Indirect Induced Total Oregon 413 767 426 1,606 Alabama 329 579 293 1,201 Georgia 279 543 342 1,163

4 An Economic Analysis of the U.S. Wooden Railway Tie Industry

1. Introduction

The industry segments analyzed in this study include portions of: Direct Impacts, 2016 • Sawmills (NAICS 321113) Output: $2.4 billion • Wood Preservation (NAICS 321114) Employment: 5,062 jobs

Total direct output of these focus industries amounted to $2.4 billion in 2016. This activity supported roughly 5,062 jobs and generated $614 million of value added, including $285 million of labor compensation.

Together with upstream suppliers and downstream distributors, the wooden railway tie industry accounts for $7.7 billion in output and nearly 33,400 U.S. jobs. Total Impacts, 2016 Output: $7.7 billion Important economic trends and developments Employment: 33,397 jobs impacting this industry are primarily:

• General Economic Health – Strong economic performance helps both consumers and businesses. Sales to other industries, particularly railroad transportation, account for the vast majority of wooden railway ties. A recession or economic slowdown would result in reduced revenues for manufacturers. • Trade Policy – Escalating tensions with trading partners could negatively impact domestic markets. Tariffs have the potential to hurt some U.S. manufacturers and eat away at domestic consumers’ purchasing power. • Infrastructure Investment – An uptick in infrastructure investment, especially in rail transportation infrastructure, would benefit the wooden railway tie industry.

An Economic Analysis of the U.S. Wooden Railway Tie Industry

2. Industry Overview

This section describes recent industry patterns of the RTA focus industries. This portion of the analysis utilizes the Inforum Iliad (Interindustry Large-scale Integrated And Dynamic) model of the United States. The Iliad model includes a database of output, employment, value added, and other concepts at a level of 352 producing sectors, which is approximately 5- to 6-digit NAICS detail in most cases.

All of the data present in this report represents the RTA share of the relevant industries in the model. The Iliad sector named ‘Sawmills and Wood Preservation’, encompasses both ‘Sawmills’ (NAICS 321113) and ‘Wood Preservation’ (NAICS 321114). 2.1 Output

Output, in economic terms, refers to the total value of all goods and services produced by an industry. Figure 1 shows historical output from 2002 to 2016. Data underlying this graph are in Table 1.

Output of wooden railway ties increased steadily between 2005 and 2009, ultimately reaching $2.5 billion. Effects of the Great Recession were felt in 2010, as output contracted 7.4 percent. Output rebounded a year later, growing by 10.5 percent. Moderate expansion continued for two additional years, but momentum could not be sustained. RTA-related output fell from $2.7 billion in 2013 to $2.0 billion in 2014, a decline of 27.8 percent. The railway tie Direct output in RTA-related industries industry’s output grew 19.5 percent in exceeded $2.4 billion in 2016. 2015, rising to $2.5 billion. Output levels fell by 1.9 percent in 2016 and finished the year at $2.4 billion. Between 2002 and 2016, RTA-related output increased by an average annual rate of 1.3 percent.

Real output can be decomposed into the distribution of output to other industries and to final demand. Figure 2 shows the distribution of total RTA-related output in 2016. The overwhelming majority of sales are made to other industries. Sales to other industries constitute intermediate demand; all other sales are final demand. Relevant final demand categories for this industry include inventory change ($21.3 million) and net exports (-$279.8 million). Please note that the sum of the columns (intermediate demand and final demand) in Figure 2 total $2,416 million and match the 2016 output displayed in Table 1.

6 An Economic Analysis of the U.S. Wooden Railway Tie Industry

Figure 1. Output Units: Millions of 2016 Dollars

3,000

2,677

2,673

2,576

2,498

2,463 2,448

2,500 2,416

2,321

2,303

2,231

2,027

2,019 1,991

2,000 1,959 1,830

1,500 Million 2016$ Million

1,000

500

0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Table 1. Output Units: Millions of 2016 Dollars

Level Growth Rate 2002 2,019 2003 1,991 -1.4% 2004 1,830 -8.5% 2005 1,959 6.8% 2006 2,231 13.0% 2007 2,303 3.1% 2008 2,448 6.1% 2009 2,498 2.0% 2010 2,321 -7.4% 2011 2,576 10.5% 2012 2,673 3.7% 2013 2,677 0.2% 2014 2,027 -27.8% 2015 2,463 19.5% 2016 2,416 -1.9%

An Economic Analysis of the U.S. Wooden Railway Tie Industry

Figure 2. Distribution of Output in 2016, RTA Product Scope Units: Millions of Dollars

3,000 2,674.3

2,500

2,000

1,500

1,000 Million $ Million

500 245.3 21.3 0

-500 -525.1

-1,000 Total Intermediate Inventory Change Exports Imports Demand

8 An Economic Analysis of the U.S. Wooden Railway Tie Industry

2.2 Employment

Total direct employment is shown in Figure 3. Employment data and growth rates are available in Table 2.

Like most manufacturing industries, the railway tie industry was not immune to the Great Recession. Employment levels among RTA-related industries were roughly 6,250 as of 2008. Two straight years of sizable job losses followed, including an 8.5 percent reduction in 2010. A year later, industry employment levels surged by 15.4 percent and approached 6,300 persons. This gain was short- Direct employment in RTA- lived, however, and three additional years of related industries has trended job cuts followed. Performance has been downwards in recent years, but mixed in the last two years, with job totals rising productivity gains are 7.6 percent in 2015 and slipping 6.8 percent in encouraging. Employment 2016. The number of persons employed at approached 5,100 jobs in 2016. RTA-related industries reached 5,062 in 2016.

While job gains have been slight in recent years, it is important to note that labor productivity has been growing. Firms are able to achieve increasing levels of output using less labor. Labor productivity increased at an average rate of 2.2 percent per year between 2007 and 2016. This performance compares favorably to the overall economy.

Figure 3. Employment Units: Jobs

7,000

6,285

6,250

6,074

6,013 5,905

6,000 5,864

5,624

5,418

5,386

5,278

5,087

5,062

5,023 5,007 5,000 4,959

4,000 Employees

3,000

2,000

1,000

0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

An Economic Analysis of the U.S. Wooden Railway Tie Industry

Table 2. Employment by Industry Segment Units: Jobs

Level Growth Rate 2002 5,624 2003 5,087 -10.0% 2004 4,959 -2.5% 2005 5,007 1.0% 2006 5,278 5.3% 2007 5,905 11.2% 2008 6,250 5.7% 2009 5,864 -6.4% 2010 5,386 -8.5% 2011 6,285 15.4% 2012 6,074 -3.4% 2013 6,013 -1.0% 2014 5,023 -18.0% 2015 5,418 7.6% 2016 5,062 -6.8%

2.3 Value Added

Value added represents the enhancement a manufacturer provides (ex: assembly) to a product before offering it to the end consumer. Put another way, value added is the difference between total revenue of an industry and the cost of intermediate inputs. Components of value added include employee labor compensation, taxes on production and imports, and gross operating surplus (profits). Value added can be thought of as the industry’s contribution to overall GDP.

Figure 4 displays total value added of RTA-related activity. Levels and annual growth rates are provided in Table 3.

RTA-related total value added rose by an average of 9.6 percent annually between 2004 RTA direct value added and 2009, ultimately reaching $512.3 million. approached $614 million in 2016. This robust growth could not be sustained and value added slipped 9.4 percent in 2010 and 3.0 percent in 2011. Value added growth among railway tie producers was volatile between 2012 and 2015, including a surge of 32.3 percent in 2012 and a 23.4 percent decline in 2014. Most recently, value added rose 13.7 percent in 2015 and declined 1.6 percent in 2016. RTA-related value added finished the period at $613.8 million. Despite the unstable value-added performance in recent years, gains averaged 4.8 percent per year between 2002 and 2016.

10 An Economic Analysis of the U.S. Wooden Railway Tie Industry

Figure 4. Value Added Units: Millions of Dollars

800

700 686.8

624.9

623.8 613.8

600

543.8

512.3 502.9

500

466.3

452.5

452.2 413.8

400

369.8

Million $ Million

325.0

317.7 312.1 300

200

100

0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Table 3. Value Added Units: Millions of Dollars

Level Growth Rate 2002 312.1 2003 325.0 4.1% 2004 317.7 -2.3% 2005 369.8 15.2% 2006 413.8 11.2% 2007 452.2 8.9% 2008 502.9 10.6% 2009 512.3 1.9% 2010 466.3 -9.4% 2011 452.5 -3.0% 2012 624.9 32.3% 2013 686.8 9.5% 2014 543.8 -23.4% 2015 623.8 13.7% 2016 613.8 -1.6%

An Economic Analysis of the U.S. Wooden Railway Tie Industry

2.4 Labor Compensation

Labor compensation, a component of value added1, is the sum of salary/wages and supplements. Supplements can take the form of employer contributions for employee pensions and insurance funds (ex: health insurance) and employer contributions for government social insurance (ex: social security).

Figure 5 illustrates the total labor compensation of RTA-related activity. Additional details, including growth rates, are provided in Table 4.

In general, labor compensation has followed a similar path as overall value added. Compensation grew for five Labor compensation of RTA-related consecutive years, including double employees reached $285 million in 2016. digit growth in both 2006 and 2007. Compensation levels reached a relative peak of $298.6 billion in 2008. Some gains were erased by recession era losses in 2009 and 2010. However, labor compensation of RTA-related employees surged 19.2 percent in 2011, rising to $308.9 million. Following a 12.0 percent decline in 2014, compensation rose by 10.2 percent a year later. Compensation levels dipped 6.3 percent in 2016, finishing the year at $285 million.

Labor compensation’s share of total value added was approximately 46 percent in 2016. Taxes on production and imports and gross operating surplus (profits) make up the remainder of total value added.

1 Value added is the sum of Labor compensation, Gross operating surplus, and Taxes on Production and imports less subsidies. Either or both of the latter two categories can be negative, which results in Labor compensation greater than value added.

12 An Economic Analysis of the U.S. Wooden Railway Tie Industry

Figure 5. Labor Compensation Units: Millions of Dollars

350

309.3

308.9

304.3 303.6

300 298.6

285.0

279.0

274.2

270.7 254.8

250 241.8

217.9

201.2 195.3 200 192.4

Million $ Million 150

100

0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Table 4. Labor Compensation Units: Millions of Dollars

Level Growth Rate 2002 195.3 2003 192.4 -1.5% 2004 201.2 4.5% 2005 217.9 8.0% 2006 241.8 10.4% 2007 279.0 14.3% 2008 298.6 6.8% 2009 270.7 -9.8% 2010 254.8 -6.1% 2011 308.9 19.2% 2012 304.3 -1.5% 2013 309.3 1.6% 2014 274.2 -12.0% 2015 303.6 10.2% 2016 285.0 -6.3%

An Economic Analysis of the U.S. Wooden Railway Tie Industry

3. National Economic Impact Analysis

The impact of the wooden railway tie industry certainly extends beyond the direct economic impacts as measured by the variables presented in the industry overview in the previous section. Jobs are also supported in supplier (“upstream”) industries that provide components, materials, energy, and various services to the railway tie industry, as well as the transportation and trade industries that distribute these inputs. In addition to these upstream impacts, jobs are supported in wholesale and retail trade (“downstream”) industries that distribute RTA member company products. 3.1 Upstream Analysis

Table 5 is an example of the type of information that can be extracted from the input- output (IO) framework of the Inforum Iliad model. This table shows the top 20 elements in the column of the IO table. A column of the IO table shows the suppliers to the industry. Another way to think of it is the combination of inputs purchased to produce that industry’s products.

Table 5 shows the purchases made by the “Sawmills and wood preservation” industry. This industry includes production of both railway ties and other milled wood products (ex: beams and boards). This level of IO granularity is the most detailed made available by BEA. These represent the intermediate inputs used to create the final product. The first column displays the rank and the next two columns show the NAICS code(s) and title of each supplying industry. The fourth column lists the share of total output. Total output of each industry is the sum of all purchases from other industries, plus value added. In the case of “Sawmills and wood preservation”, intermediate inputs accounted for 72.3 percent of total input value, while value added made up the remaining 27.7 percent.

The largest amount of purchases were from the “Forestry and logging” industry. This sector provides the raw lumber used to produce wooden railway ties. The second largest purchase was from other establishments within the “Sawmills and wood preservation” industry. The third largest purchase is from “Wholesale trade”. This represents the trade margins paid on inputs from suppliers to the “Sawmills and wood preservation” industry. “Management of companies and enterprises” provide strategic planning and other organizational resources. “Truck transportation” and “Rail transportation” make up the fifth and sixth largest suppliers to the “Sawmill and wood preservation” industry. These two industries help move goods along the supply chain. Positions 7 and 8, meanwhile, are chemical industries which supply important inputs needed to preserve rail ties.

Each of the industries listed in Table 5 also provide employment, generate value added, and require supplies from other industries. For most supplier industries, a certain share is imported. This imported share does not contribute to the generation of U.S. income, jobs, and production.

14 An Economic Analysis of the U.S. Wooden Railway Tie Industry

Table 5. Top Upstream Suppliers to Sawmills and Wood Preservation (NAICS 3211) in 2016 Units: Percent of Total Output Rank NAICS Industry Title Share 1 113 Forestry and logging 29.5% 2 3211 Sawmills and wood preservation 16.8% 3 42 Wholesale trade 7.2% 4 55 Management of companies and enterprises 3.2% 5 484 Truck transportation 2.6% 6 482 Rail transportation 1.1% 7 32518 Other basic inorganic chemicals 1.0% 8 32519 Other basic organic chemicals 0.9% 9 2211 Electric power generation, transmission, and distribution 0.8% 10 5617 Services to buildings and dwellings 0.6% 11 5412 Accounting, tax preparation, bookkeeping, and payroll services 0.6% 12 2212 Natural gas distribution 0.5% 13 5182 Data processing, hosting, and related services 0.5% 14 7222 Limited-service restaurants 0.4% 15 23 Nonresidential maintenance and repair 0.3% 16 5411 Legal services 0.3% 17 32411 Petroleum refineries 0.3% 18 5413 Architectural, engineering, and related services 0.3% 19 5418 Advertising, public relations, and related services 0.3% 20 521, 5221 Monetary authorities and depository credit intermediation 0.2% Other purchases from upstream suppliers 4.9% Value Added 27.7% Total Output 100.0%

In this analysis, the domestic production, also called the direct output, of industry segments serves as our starting point. From this, we derive the inputs of the supplier industries, stripping off an estimated share of imports, and allocating a certain amount to value added. These supplier industries in turn generate demand for their supplier industries. The process continues back to each stage of supplier, with imports and value added removed in each step. At some point, the additional calculated supplier input becomes vanishingly small. All of the output generated beyond the direct output is called the indirect output.

Associated with direct output is the employment required in that sector to produce its output, as well as the value added or income earned. Part of this value added is labor income. The indirect output also generates employment, value added, and labor income. Table 6 and Figure 6 show the results of the upstream analysis, providing a summary of total direct and indirect output, employment, value added, and labor income.

Table 6. Summary of Upstream Analysis Units Indicated

An Economic Analysis of the U.S. Wooden Railway Tie Industry

Direct output, which is the starting point, was supplied by RTA and industry RTA-related activity helped support experts. In 2016, this is estimated to be approximately $2.4 billion dollars. Direct over $2.8 billion in upstream indirect employment totaled 5,062 jobs. Value output and nearly 13,800 upstream added generated was about $614 jobs. million, and of this, about $285 million was labor income. This is all shown in the first row of Table 6. From the second row, we can see that indirect output amounted to an additional $2.8 billion, generating 13,780 jobs, $1.4 billion in value added, and $883 million in labor income.

Figure 6. Upstream Analysis Units Indicated

Output Effects Employment Effects (Million $) (# of Persons) $3,000 $2,811 15,000 13,780 $2,416 $2,500 10,805 $2,000 $1,752 10,000 $1,500 5,062 $1,000 5,000 $500 $0 0 Direct Indirect Induced Direct Indirect Induced

Value Added Effects Labor Income Effects (Million $) (Million $) $1,500 $1,351 $1,000 $883

$978 $800 $1,000 $600 $551 $614 $400 $500 $285 $200 $0 $0 Direct Indirect Induced Direct Indirect Induced

In addition to the direct and indirect impacts, we have calculated induced output. This represents the additional demand generated by the disposable income earned in the industry (this may be both wage income and capital income). We estimate the mix of consumer goods and services purchased by this income, and calculate the output, employment, value added, and labor income associated with this induced output. This is shown in the third row of Table 6. The total impacts are summarized in the fourth row. For example, the total upstream direct, indirect, and induced employment comes to 29,647 jobs.

16 An Economic Analysis of the U.S. Wooden Railway Tie Industry

Note that Table 6 shows only a summary of results. Each industry has its particular employment to output ratio, value added to output ratio, and labor income to output ratio. For example, a dollar of output generated in the retail trade industry creates more jobs than a dollar in the automobile manufacturing industry. The latter industry, on the other hand, generates more capital income per dollar of output. The individual footprint of any given industry is a result of several factors:

• The distribution of purchases from supplier industries, and the purchases from their suppliers, etc. • The labor/output, value added/output, and labor income/output ratios in each industry. • The import share of each industry.

3.2 Downstream Analysis

In addition to jobs, value added, and output in the supplier industries, some portion of economic activity in the wholesale and retail trade industries is due to sales of RTA- related products. This impact, which is often termed the “downstream” impact, also has direct, indirect, and induced components.

The IO framework includes estimates of margins on each transaction. These may be wholesale and retail markups, the cost necessary to bring the product to its final users. Looking across the row of the IO table shows the distribution of buyers of each product. Table 7 shows the largest elements of such distribution by industry segment.

Table 7. Sawmills and Wood Preservation (NAICS 32111) Sales to Other Sectors

% of Rank NAICS Industry Title Intermediate Sales 1 3211 Sawmills and wood preservation 15.2% 2 32191 Millwork 10.0% 3 32192, 32199 All other wood products 9.1% 4 3212 Veneer, plywood, and engineered wood products 7.6% 5 23 Single-family residential structures 6.6% 6 32212, 32213 Paper and paperboard mills 6.2% 7 482 Rail transportation 4.7% 8 23 Nonresidential maintenance and repair 4.1% 9 23 Other residential structures 3.8% 10 23 Educational and vocational structures 3.7% 11 23 Other nonresidential structures 2.7% 12 33712 Household and institutional furniture 2.3% 13 33711 Wood kitchen cabinet and countertops 2.3% 14 32211 Pulp mills 2.3% 15 23 Commercial structures, including farm structures 1.9% 16 33721 Office furniture (including fixtures) 1.8% 17 7221 Full-service restaurants 1.2% 18 23 Health care structures 1.1% 19 23 Residential maintenance and repair 1.0% 20 23 Power and communication structures 0.9% All other sectors 11.5% Total Intermediate Demand 100.0%

An Economic Analysis of the U.S. Wooden Railway Tie Industry

Most of these purchasing industries buy products through wholesale dealers. A small amount of purchases from this industry are made through retail trade. For the downstream analysis, we calculated intermediate and final sales by each of the industry segments. Next, we calculated the wholesale and retail margins associated with these sales. The total margins were taken as direct output for the downstream analysis.

Table 8 and Figure 7 show a summary of the direct, indirect, and induced impacts arising from downstream sales. The first row of the table shows direct output at $310 million. This is the total wholesale and retail margins associated with sales of RTA-related manufacturing activity. Wholesale and retail trade employment due to this activity is 1,304 persons. Direct value added and labor income are $207 million and $107 million, respectively.

As in the upstream supplier analysis, downstream impacts also lead to indirect and induced output, Total downstream effects and their associated employment, value added, and labor income. These are shown in the second generate $718 million in and third rows of Table 8, with the total of direct, output and 3,750 jobs. indirect, and induced at the bottom.

Table 8. Summary of Downstream Analysis Units Indicated

Output Employment Value Added Labor Income (Million $) (Persons) (Million $) (Million $) Direct 310 1,304 207 107 Indirect 159 912 93 58 Induced 249 1,533 139 78 Total 718 3,750 439 243

18 An Economic Analysis of the U.S. Wooden Railway Tie Industry

Figure 7. Downstream Analysis Units Indicated

Output Effects Employment Effects (Million $) (# of Persons) $400 2,000 $310 1,533 $300 $249 1,500 1,304 912 $200 $159 1,000

$100 500

$0 0 Direct Indirect Induced Direct Indirect Induced

Value Added Effects Labor Income Effects (Million $) (Million $) $250 $120 $107 $207 $100 $200 $78 $139 $80 $150 $58 $93 $60 $100 $40 $50 $20 $0 $0 Direct Indirect Induced Direct Indirect Induced

Table 9 shows the combined results from the upstream and downstream analysis. Total national employment from upstream and downstream output amounts to almost 33,400 jobs. Total output, meanwhile, sums to $7.7 billion.

Table 9. Combined Summary Units Indicated

Output Employment Value Added Labor Income (Million $) (Persons) (Million $) (Million $) Upstream 6,979 29,647 2,943 1,719 Downstream 718 3,750 439 243 Total 7,698 33,397 3,382 1,962

An Economic Analysis of the U.S. Wooden Railway Tie Industry

4. State-Level Economic Impact Analysis

The national level economic impacts described in section 3 can be seen as the sum of economic impacts at the state level. National level direct production have been distributed to the state level using employment shares taken from the BLS Census of Employment and Wages (CEW), for both the upstream and the downstream analysis. Next, IMPLAN’s database was used to calculate direct employment, value-added, and labor compensation.

IMPLAN is also used to calculate the indirect and induced impacts of production. IMPLAN is often used by business professionals, researchers, and elected officials to assess potential local economic impacts of various projects. We have used IMPLAN to calculate direct, indirect, and induced upstream impacts for output, employment (jobs), total value added, and labor income. These impacts have been calculated for both the upstream and downstream impacts of RTA-related activity.

RTA staff have identified twenty-five states of interest. These include the following:

• Alabama • Louisiana • Ohio • Arkansas • Maine • Oregon • California • Michigan • Pennsylvania • Florida • Minnesota • Tennessee • Georgia • Mississippi • Texas • Illinois • Missouri • Virginia • Indiana • New Jersey • Wisconsin • Iowa • New York • Kentucky • North Carolina

Figure 8. RTA State Focus

20 An Economic Analysis of the U.S. Wooden Railway Tie Industry

4.1 Upstream Output Impacts

Oregon was the highest-ranking state for total RTA-related upstream impacts, with $200.3 million in direct impacts and $386.5 million in total impacts. Georgia came in second with $144.8 million and $287.3 million in direct and total impacts, respectively. Alabama ranked third, with total upstream impacts of $284.7 million.

Table 10. Upstream Output Impacts by State Units: Million $ Direct Indirect Induced Total State Impacts Impacts Impacts Impacts Alabama 157.5 89.6 37.6 284.7 Arkansas 134.9 79.9 28.1 242.9 California 100.5 64.5 30.1 195.1 Florida 74.0 50.6 27.4 152.0 Georgia 144.8 95.7 46.8 287.3 Illinois 12.6 6.4 3.6 22.5 Indiana 47.6 22.7 11.2 81.6 Iowa 11.4 4.9 2.4 18.6 Kentucky 66.1 39.7 16.2 122.0 Louisiana 48.4 25.6 10.8 84.9 Maine 47.9 32.3 14.0 94.3 Michigan 58.4 39.4 21.1 118.9 Minnesota 26.6 13.6 8.2 48.4 Mississippi 107.2 57.4 19.3 183.9 Missouri 30.4 20.8 9.5 60.7 New Jersey 2.0 1.0 0.5 3.6 New York 39.1 26.1 11.7 77.0 North Carolina 137.9 84.6 37.4 259.8 Ohio 34.9 22.9 11.8 69.6 Oregon 200.3 130.8 55.4 386.5 Pennsylvania 93.9 64.8 32.5 191.2 Tennessee 51.6 31.0 13.5 96.1 Texas 87.9 60.7 28.7 177.2 Virginia 109.7 57.6 25.2 192.5 Wisconsin 62.5 33.6 15.7 111.9 Other States 527.7 1,655.1 1,233.3 3,416.2 U.S. TOTAL 2,415.8 2,811.5 1,752.0 6,979.3

An Economic Analysis of the U.S. Wooden Railway Tie Industry

4.2 Upstream Employment Impacts

Table 11 shows upstream employment impacts for each state. Oregon was again the leader for upstream employment impacts, with 413 direct and 1,606 total jobs. This time Alabama came in second, with 329 direct upstream jobs and 1,201 total jobs. Georgia upstream employment was similar, with 279 direct and 1,163 total jobs.

Table 11. Upstream Employment Impacts by State Units: Jobs Direct Indirect Induced Total State Impacts Impacts Impacts Impacts Alabama 329 579 293 1,201 Arkansas 271 458 222 951 California 212 335 188 735 Florida 170 304 200 673 Georgia 279 543 342 1,163 Illinois 29 34 24 87 Indiana 110 134 86 330 Iowa 26 30 18 75 Kentucky 154 239 125 518 Louisiana 99 163 86 347 Maine 106 222 109 437 Michigan 141 239 157 536 Minnesota 55 83 59 197 Mississippi 211 383 157 751 Missouri 70 118 71 259 New Jersey 5 5 4 14 New York 102 141 74 317 North Carolina 280 506 278 1,064 Ohio 83 125 86 294 Oregon 413 767 426 1,606 Pennsylvania 209 341 229 778 Tennessee 115 186 99 400 Texas 195 337 197 729 Virginia 210 320 177 707 Wisconsin 135 207 119 461 Other States 1,056 6,981 6,979 15,016 U.S. TOTAL 5,062 13,780 10,805 29,647

22 An Economic Analysis of the U.S. Wooden Railway Tie Industry

4.3 Upstream Value Added Impacts

Table 12 shows the upstream value added impacts. Oregon again ranked in the top three, with $52.4 million in direct value added impacts and $151.2 million total. Georgia followed close behind, with $123.4 million in total value added and $46.2 million in direct value added impacts. North Carolina ranked third, with $38.6 million and $102.6 million in direct and total value added impacts, respectively.

Table 12. Upstream Value Added Impacts by State Units: Million $ Direct Indirect Induced Total State Impacts Impacts Impacts Impacts Alabama 40.4 40.7 20.9 101.9 Arkansas 39.0 38.8 15.8 93.6 California 24.3 35.7 18.4 78.4 Florida 12.8 27.1 15.7 55.6 Georgia 46.2 49.8 27.4 123.4 Illinois 2.4 3.6 2.2 8.2 Indiana 8.4 11.0 6.5 25.9 Iowa 2.1 2.5 1.3 5.9 Kentucky 10.9 18.9 9.0 38.9 Louisiana 13.3 12.5 6.2 31.9 Maine 9.9 14.5 8.1 32.4 Michigan 7.4 19.7 12.1 39.3 Minnesota 7.1 7.3 4.7 19.0 Mississippi 32.6 25.5 10.4 68.5 Missouri 5.5 10.5 5.5 21.5 New Jersey 0.3 0.6 0.3 1.2 New York 1.6 14.7 7.6 24.0 North Carolina 38.6 42.4 21.5 102.6 Ohio 5.2 12.2 6.9 24.3 Oregon 52.4 66.5 32.4 151.2 Pennsylvania 19.4 34.4 19.5 73.3 Tennessee 10.7 15.2 7.8 33.6 Texas 18.3 32.0 16.5 66.8 Virginia 36.6 30.1 15.1 81.8 Wisconsin 14.9 16.5 9.1 40.5 Other States 153.7 768.3 677.1 1,599.0 U.S. TOTAL 613.8 1,350.9 978.0 2,942.7

An Economic Analysis of the U.S. Wooden Railway Tie Industry

4.4 Upstream Labor Income Impacts

Table 13 shows direct, indirect, induced, and total upstream labor income impacts by state. Oregon was first in total upstream labor income impacts at $87.5 million. Georgia was second, at $65.0 million, and last was Alabama, with $60.7 million in total upstream labor income impacts.

Table 13. Upstream Labor Income Impacts by State Units: Million $ Direct Indirect Induced Total State Impacts Impacts Impacts Impacts Alabama 21.6 28.0 11.2 60.7 Arkansas 13.1 24.6 8.3 45.9 California 11.3 23.1 10.3 44.6 Florida 8.9 17.9 8.6 35.4 Georgia 17.4 33.0 14.6 65.0 Illinois 1.5 2.3 1.2 5.0 Indiana 6.0 7.6 3.7 17.2 Iowa 1.5 1.6 0.7 3.9 Kentucky 8.3 12.9 5.0 26.2 Louisiana 5.4 8.2 3.4 16.9 Maine 5.9 10.3 4.3 20.4 Michigan 9.9 13.9 6.8 30.6 Minnesota 3.8 5.0 2.8 11.6 Mississippi 10.6 16.5 5.3 32.4 Missouri 3.4 7.2 3.0 13.6 New Jersey 0.3 0.4 0.2 0.9 New York 6.6 10.2 4.3 21.0 North Carolina 14.1 28.3 11.6 54.0 Ohio 4.3 8.3 3.7 16.3 Oregon 22.8 46.1 18.6 87.5 Pennsylvania 11.6 24.3 11.2 47.1 Tennessee 5.5 9.7 4.7 19.9 Texas 10.8 19.6 9.4 39.8 Virginia 12.3 20.1 8.1 40.5 Wisconsin 7.1 11.4 5.0 23.5 Other States 61.2 492.8 384.9 938.9 U.S. TOTAL 285.0 883.3 550.6 1,718.9

24 An Economic Analysis of the U.S. Wooden Railway Tie Industry

4.5 Downstream Output Impacts

California was the highest-ranking state for total RTA-related downstream impacts, with $69.3 million in total impacts. Texas came in second with $54.6 million in total downstream output. Florida ranked third, with total downstream impacts of $34.8 million.

Table 14. Downstream Output Impacts by State Units: Million $ Direct Indirect Induced Total State Impacts Impacts Impacts Impacts Alabama 3.9 1.2 1.3 6.5 Arkansas 2.5 0.7 0.7 3.9 California 37.8 15.2 16.3 69.3 Florida 18.0 7.8 8.9 34.8 Georgia 11.5 4.4 5.2 21.1 Illinois 15.9 5.6 7.5 29.0 Indiana 6.3 1.9 2.3 10.5 Iowa 3.5 1.1 1.2 5.8 Kentucky 4.0 1.2 1.2 6.4 Louisiana 3.8 1.2 1.3 6.2 Maine 1.1 0.4 0.4 1.8 Michigan 9.1 3.1 3.9 16.1 Minnesota 7.0 2.7 3.5 13.1 Mississippi 1.8 0.5 0.5 2.8 Missouri 6.4 2.3 2.8 11.6 New Jersey 11.3 3.9 4.9 20.1 New York 17.8 6.1 6.5 30.4 North Carolina 9.7 3.5 4.1 17.3 Ohio 12.5 4.8 5.7 22.9 Oregon 4.0 1.5 1.6 7.1 Pennsylvania 11.6 4.1 5.3 21.0 Tennessee 6.4 2.1 2.5 11.0 Texas 30.7 10.6 13.3 54.6 Virginia 5.9 2.1 2.2 10.2 Wisconsin 6.5 2.3 2.6 11.5 Other States 61.4 69.0 142.9 273.4 U.S. TOTAL 310.4 159.4 248.6 718.4

An Economic Analysis of the U.S. Wooden Railway Tie Industry

4.6 Downstream Employment Impacts

Table 15 shows downstream employment impacts for each state. California lead in downstream employment impacts, with 155 direct and 342 total jobs. Texas came in second, with 114 direct downstream jobs and 272 total downstream jobs. Florida upstream employment was third, with 79 direct and 197 total jobs.

Table 15. Downstream Employment Impacts by State Units: Jobs Direct Indirect Induced Total State Impacts Impacts Impacts Impacts Alabama 19 9 10 38 Arkansas 10 5 6 21 California 155 86 102 342 Florida 79 53 65 197 Georgia 48 29 38 115 Illinois 62 33 51 146 Indiana 29 14 18 60 Iowa 17 8 9 33 Kentucky 17 9 10 36 Louisiana 17 8 10 35 Maine 5 3 3 11 Michigan 39 20 29 88 Minnesota 31 17 25 72 Mississippi 9 4 4 17 Missouri 29 15 21 65 New Jersey 43 22 32 98 New York 71 32 41 144 North Carolina 44 24 30 99 Ohio 57 31 42 130 Oregon 19 10 12 41 Pennsylvania 49 24 37 110 Tennessee 27 14 19 59 Texas 114 67 92 272 Virginia 25 13 16 54 Wisconsin 31 15 20 66 Other States 260 347 793 1,400 U.S. TOTAL 1,304 912 1,533 3,750

26 An Economic Analysis of the U.S. Wooden Railway Tie Industry

4.7 Downstream Value Added Impacts

Table 16 shows the downstream value added impacts for our states of interest. California again came in first place, with $25.5 million in direct value added impacts and $45.1 million in total downstream value added. Texas followed close behind, with $21.6 million in direct value added and $35.5 million in total value added impacts. Florida ranked third, with $11.8 million and $21.4 million in direct and total value added impacts, respectively.

Table 16. Downstream Value Added Impacts by State Units: Million $ Direct Indirect Induced Total State Impacts Impacts Impacts Impacts Alabama 2.4 0.7 0.7 3.8 Arkansas 1.6 0.4 0.4 2.4 California 25.5 9.6 10.0 45.1 Florida 11.8 4.5 5.1 21.4 Georgia 7.7 2.6 3.0 13.4 Illinois 11.0 3.5 4.5 19.1 Indiana 4.0 1.1 1.3 6.5 Iowa 2.2 0.6 0.7 3.5 Kentucky 2.6 0.7 0.7 4.0 Louisiana 2.4 0.7 0.7 3.8 Maine 0.7 0.2 0.2 1.1 Michigan 6.1 1.8 2.2 10.1 Minnesota 4.6 1.6 2.0 8.1 Mississippi 1.1 0.3 0.3 1.7 Missouri 4.1 1.4 1.6 7.1 New Jersey 7.9 2.5 3.0 13.4 New York 12.1 4.1 4.2 20.4 North Carolina 6.2 2.1 2.3 10.6 Ohio 8.0 2.8 3.3 14.1 Oregon 2.5 0.9 0.9 4.3 Pennsylvania 7.8 2.6 3.2 13.5 Tennessee 4.3 1.2 1.5 7.0 Texas 21.6 6.2 7.7 35.5 Virginia 3.9 1.3 1.3 6.6 Wisconsin 4.1 1.3 1.5 6.9 Other States 41.0 38.7 76.2 155.9 U.S. TOTAL 207.4 93.4 138.8 439.5

An Economic Analysis of the U.S. Wooden Railway Tie Industry

4.8 Downstream Labor Income Impacts

Table 17 shows downstream labor income impacts by state. California was first in total upstream labor income impacts at $24.2 million. Texas was second, at $18.5 million, and last was New York with $11.6 million in total downstream labor income impacts.

Table 17. Downstream Labor Income Impacts by State Units: Million $ Direct Indirect Induced Total State Impacts Impacts Impacts Impacts Alabama 1.3 0.4 0.4 2.1 Arkansas 0.7 0.2 0.2 1.2 California 12.6 6.1 5.6 24.2 Florida 5.9 2.7 2.8 11.5 Georgia 4.0 1.6 1.6 7.2 Illinois 5.7 2.2 2.5 10.4 Indiana 2.1 0.7 0.8 3.6 Iowa 1.2 0.4 0.4 1.9 Kentucky 1.2 0.4 0.4 2.0 Louisiana 1.2 0.4 0.4 2.0 Maine 0.3 0.1 0.1 0.6 Michigan 3.2 1.1 1.2 5.6 Minnesota 2.7 1.1 1.2 4.9 Mississippi 0.5 0.2 0.1 0.8 Missouri 2.3 0.8 0.9 4.0 New Jersey 4.4 1.6 1.8 7.8 New York 6.7 2.6 2.3 11.6 North Carolina 3.4 1.3 1.3 5.9 Ohio 4.3 1.7 1.8 7.8 Oregon 1.4 0.5 0.5 2.5 Pennsylvania 4.2 1.6 1.8 7.6 Tennessee 2.1 0.8 0.9 3.8 Texas 10.2 3.9 4.4 18.5 Virginia 2.1 0.8 0.7 3.6 Wisconsin 2.3 0.8 0.8 3.9 Other States 21.4 23.7 43.2 88.4 U.S. TOTAL 107.4 57.9 78.1 243.5

28 An Economic Analysis of the U.S. Wooden Railway Tie Industry

5. Summary and Main Findings

This study has defined the scope of the wooden railway tie industry to include portions of the sawmill and wood preservation industries. After consultation with RTA and industry experts, we have estimated the appropriate size of the overall industry and compiled recent historical data on output, employment, value added, and labor income.

Total RTA-related activity, as measured by output, expanded steadily through the mid-to late 2000s, but endured a sizable decline in 2010 as a result of the Great Recession. The industry quickly gained traction in 2011, posting growth of 10.5 percent. Output declined sharply in 2014, falling by 27.8 percent. The rail tie industry rebounded in 2015 and grew by 19.5 percent. In 2016, output dipped by 1.9 percent to finish the year at $2.4 billion. RTA-related output grew by an average annual rate of 1.3 percent between 2002 and 2016.

Employment among railway tie manufacturers contracted during the Great Recession, falling 6.4 percent in 2009 and 8.5 percent in 2010. By the end of the recession employment dropped to 5,386. Losses were erased in 2011, when employment grew by 15.4 percent. Following three consecutive years of In 2016, RTA–related direct job cuts, employment grew by 7.6 percent in output totaled $2.4 billion and 2015. The number of persons employed at RTA- supported over 5,000 jobs. related industries totaled 5,062 in 2016.

The domestic wooden railway tie industry is tightly interwoven with other manufacturing sectors and several service sectors that supply important materials, components and parts, as well as financial, IP, management, and transportation services. RTA-related activity accounted for $2.4 billion in direct output in 2016, creating 5,062 jobs. Reliance on suppliers in other sectors generates an additional 13,780 jobs. Finally, induced impacts of spending of earnings in the direct and indirect sectors contributed to an additional 10,805 jobs, bringing the total upstream jobs impact addressed in this study to 29,647. Total output, including direct, indirect, and induced impacts, approached $7.0 billion

Downstream analysis addresses the question of output and jobs generated in the distribution of wooden railway ties through wholesale and retail outlets. Total direct trade output is the margin or markup earned on sales. This is estimated to be $310 million in 2016, which supports 1,304 direct jobs. An additional 912 jobs are supported indirectly and 1,533 jobs are created by induced output. The total downstream jobs impact is estimated at 3,750.

Combining the upstream and downstream impacts results in a total output impact of $7.7 Total RTA-related activity, billion and nearly 33,400 jobs. including both upstream suppliers The state-level analysis was performed using and downstream distributors, IMPLAN databases and economic impact accounts for $7.7 billion in output models. The BLS Census of Employment and and nearly 33,400 jobs. Wages (CEW) was used to obtain employment distributions by state to estimate the direct state-level output impacts.

An Economic Analysis of the U.S. Wooden Railway Tie Industry

Both the state-level upstream and downstream analyses sum to the results derived at the national level. Of the states analyzed, Oregon accounted for the most upstream output ($386.5 million) and the greatest number of jobs (1,606). Georgia was ranked second in total output ($287.3 million) and third in jobs (1,163). Alabama’s upstream activity, meanwhile, was ranked third in output ($284.7 million) and second in employment (1,201). North Carolina and Arkansas also ranked highly in terms of upstream activity.

Downstream economic impacts, including both retail and wholesale, are typically correlated with regional population and economic activity. The top state for total RTA- related downstream impacts was California, with $69.3 million in output and 342 jobs. Texas ranked second in both output ($54.6 million) and employment (272). Florida’s downstream activity ranked third, and amounted to $34.8 million in output and 197 jobs.

30 An Economic Analysis of the U.S. Wooden Railway Tie Industry

References

Bureau of Economic Analysis (2012) RIMS II: An Essential Tool for Regional Developers and Planners, Washington, D.C. Accessed at: https://www.bea.gov/regional/pdf/rims/RIMSII_User_Guide.pdf. ______(2009) Concepts and Methods of the Input-Output Accounts. Accessed at https://www.bea.gov/papers/pdf/IOmanual_092906.pdf ______(1997) Regional Multipliers: A User Handbook for the Regional Input-Output Modeling System (RIMS II), Washington D.C. Accessed at: https://www.bea.gov/scb/pdf/regional/perinc/meth/rims2.pdf. MAPI (2016) How Important is Manufacturing Today?, access at: https://www.mapi.net/forecasts-data/how-important-us-manufacturing-today. Meckstroth, Dan (2016) The Manufacturing Value Chain is Much Bigger Than You Think!, MAPI Foundation, February, Arlington, VA, accessed at: https://www.mapi.net/system/files/attachments/files/PA-165_web_0.pdf. U.S. Bureau of the Census (2017) USA Trade Frequently Asked Questions. Accessed at https://www.census.gov/foreign-trade/statistics/dataproducts/uto-help/uto-help.html. U.S. Bureau of the Census (2012) North American Industry Classification System: United States, 2012, Executive Office of the President, Office of Management and Budget, Bernan Press, Lanham, MD, Access NAICS Related information at https://www.census.gov/eos/www/naics/. U.S. Bureau of Labor Statistics (2017) Handbook of Methods, Quarterly Census of Employment and Wages. Accessed at https://www.bls.gov/opub/hom/cew/pdf/cew.pdf.

An Economic Analysis of the U.S. Wooden Railway Tie Industry

Appendix A – Data Sources and Methodology

A.1 Data Sources

Inforum relies on a variety of data sources to build its models and produce impact studies. This study primarily relied on IMPLAN’s database and economic impact models. Other important sources of data include the Census Bureau, the Bureau of Economic Analysis (BEA), and the Bureau of Labor Statistics (BLS). Table A.1 reviews the main data sources used to support this analysis.

Table A.1. Main Data Sources Used for this Study

Agency or Economic Variables Source Survey or Publication Frequency Available IMPLAN IMPLAN Online Annual Output, Employment, Value Added, Labor Compensation, Industry Multipliers Census Bureau Annual Survey of Manufacturers Annual Establishments, Employment, Industry and Product Shipments, Value Added, Payroll, Investment, Inventories Census Bureau USA Trade Annual Exports and Imports BEA Benchmark Input-Output Table Quinquennial Make and Use Tables, 2007 had 393 Commodities BEA Gross Output by Industry Annual 393 Industries, Real, Nominal and Price BEA Annual Input-Output Tables Annual Make and Use Tables, Consumption and Investment Bridges, 71 Industries, 74 Commodities BLS CEW Annual Employment, Wages

Industry data on output, employment, value added, and other variables are organized according to the North American Industry Classification System (NAICS). The first version of NAICS was released for 1997, and since then there have been four more versions, for the years 2002, 2007, 2012, and 2017. Current Economic Census and annual data are for the most part published according to the 2012 NAICS. However, the most recent Benchmark IO table is for 2007, and this is published according to the 2007 version of the NAICS.

A-1

An Economic Analysis of the U.S. Wooden Railway Tie Industry

Table A.2. Illustration of NAICS 2012

2012 NAICS Product or industry title 32 Manufacturing (31-33) 321 Wood product manufacturing 3211 Sawmills and Wood Preservation 32111 Sawmills and Wood Preservation 321113 Sawmills

321114 Wood Preservation

NAICS is a hierarchical system. All codes beginning with ’31-33’ are part of Manufacturing, which includes codes 31, 32 and 33. More digits indicate finer levels of detail. For example, within NAICS 33 there are 8 3-digit codes. The code 333 includes all Machinery manufacturing. Within manufacturing as a whole, there are 21 3-digit sub- sectors, 86 4-digit industry groups, 180 5-digit industries, and 270 6-digit industries. At the 6- digit level, the NAICS classifications for the U.S., Canada, and Mexico are consistent.

A-2 An Economic Analysis of the U.S. Wooden Railway Tie Industry

A.2 Methodology for the National Economic Impact Analysis

The primary tool used for the national economic impact analysis is the IMPLAN2 system. IMPLAN is comprised of detailed databases, multipliers, and economic models. IMPLAN covers over 500 unique industries and contains data on output, employment, value added, labor compensation, and other economic indicators. IMPLAN is often used by business professionals, researchers, and elected officials to assess potential local economic impacts of various projects.

IMPLAN is based on the 2007 Benchmark Input-Output table produced by the Bureau of Economic Analysis (BEA).3 From the benchmark make and use tables, an industry by industry domestic (not including imports) direct requirements matrix is derived at the national level.

The economic impact analysis consists of several parts:

1. Upstream analysis – This traces the impact of a given producing industry on supplier industries, including the suppliers to those suppliers. For each industry, calculations are made on output, jobs, earnings, and value added impacts. 2. Downstream analysis – This traces the impact of purchases of products through wholesale and retail trade distribution channels. The input-output table is used to estimate the distribution and total level of wholesale and retail trade activity generated through the distribution of a given product. The Inforum Iliad model and its associated databases were utilized to calculate retail and wholesale margins of focus industries. These margins serve as the ‘direct output’ of downstream analyses. 3. Induced analysis – This additional level of impact comes about through the earnings generated in the upstream or downstream industries. It represents the impact of consumer spending from the capital and labor earnings in these industries.

The analysis is done for 2016, and all results are in 2016 dollars. The impact analysis begins with the national output of each industry segment. In the first iteration, all supplier industries’ output is calculated, using the input-output coefficients from the column of the matrix. Note that not all of the output of the focus industry goes to domestic suppliers. Some is supplied by imports, which are calculated in each iteration according to the average import share of that industry. Some of the output is paid out in value added. Both imports and value added can be thought of as leakages that reduce the total output required from domestic suppliers. In each subsequent iteration, the suppliers to the previous round of suppliers are calculated. Because of the leakages just described, the amount necessary to supply each further round becomes smaller and smaller. At some point, the additional supplier output is very small, and the process converges.

Associated with each round of direct and supplier (indirect) output are the employment, earnings and value added necessary to supply that output. When the solution has completed, the model shows the total direct, indirect, and induced effects, as well as detailed impacts by industry.

2 See www.implan.com for more detailed descriptions of IMPLAN databases and models. 3 See https://www.bea.gov/newsreleases/industry/io/ionewsrelease.htm, and accompanying materials on the BEA website.

A-3

An Economic Analysis of the U.S. Wooden Railway Tie Industry

A.3 Methodology for the State-Level Analysis

The first step in preparing the state-level analysis was to derive shares of production by state for each of the producing industry segments and for the downstream wholesale and retail industries. National level direct production is then allocated to the state level using employment shares taken from the BLS Census of Employment and Wages (CEW)4, for both the upstream and the downstream analysis.

In order to calculate the indirect and induced impacts of production, we use the IMPLAN system. National industry relationships are converted to a regional level using region- specific information on trade flows, employment, and differences in the ratio of value added to output. This results in an input-output matrix which is more representative of the target state, metro area, or other defined region. When calculating indirect and induced impacts, IMPLAN makes use of Regional Purchase Coefficients (RPC’s). These RPC’s measure the proportion of activity that is sourced from within the state or region which is the focus of the study. Products sourced from outside the state do not provide any indirect or induced spending impacts.

Upon purchasing an IMPLAN package, it is accessed via the web. For this project, we used the packages consisting of State Total Files. As mentioned above, national level direct output is shared to the states using BLS CEW data, to obtain the state-level direct output drivers. IMPLAN is then used to calculate indirect and induced output, employment, value added and earnings.

4 See BLS (2017) for more information on the CEW.

A-4

Economic Contribution of Hardwood Products: United States

Sales of hardwood products added $394.0 billion in value to the United States economy in 2016, according to an Agribusiness Consulting study commissioned by the U.S. Hardwood Federation.

Economic Contribution Results • In 2016, United States hardwood product output was valued at $152.6 billion • The economic “ripple effects” of these hardwood products supported: o $394.0 billion in economic output, o $177.5 billion in gross domestic product (GDP), and o 2,086,062 jobs in the national economy.

For every $1 million in ouput of hardwood products, 5.3 jobs and $0.45 million of GDP are supported within United States.

United States 2016 Economic Contribution1 Provided by Select Hardwood Products Jobs GDP Output Sector (#) ($ millions) ($ millions) Sawmills 387,035 $31,340.4 $70,211.7 Wood Preservation 48,425 $5,520.3 $13,520.7 Rail Ties 19,302 $2,200.4 $5,389.4 Hardwood Veneer and Plywood Manufacturing 116,480 $10,390.0 $23,857.1 Engineered wood member (except truss) manufacturing 22,790 $1,896.3 $4,405.8 Truss manufacturing 74,843 $6,227.5 $14,468.5 Wood Window and Door Manufacturing 151,854 $14,051.3 $30,723.5 Cut Stock, Re-sawing Lumber, and Planing 46,079 $4,085.1 $8,972.5 Millwork 74,185 $6,510.1 $14,055.9 Flooring 44,913 $3,941.4 $8,509.8 Wood Container and Pallet Manufacturing 155,435 $12,549.4 $27,285.3 All other Miscellaneous Wood Product Manufacturing 74,532 $6,226.8 $13,291.4 Wood Kitchen Cabinet and Countertop Manufacturing 298,934 $23,120.1 $49,309.0 Upholstered Household Furniture Manufacturing 170,110 $14,599.3 $34,964.4 Non-upholstered Wood Household Furniture Manufacturing 74,547 $5,711.1 $11,805.1 Institutional Furniture Manufacturing 69,116 $6,185.5 $13,591.3 Wood Office Furniture Manufacturing 52,066 $4,930.4 $10,423.9 Custom Architectural Woodwork and Millwork Manufacturing 54,543 $4,760.0 $9,683.9 Showcase, Partition, Shelving, and Locker Manufacturing 135,945 $12,453.6 $28,127.7 Blind and Shade Manufacturing 34,229 $2,960.3 $6,759.8 Total 2,086,062 $177,458.9 $393,967.3 Exports 206,020 $17,821.0 $39,842.7 1 Economic contribution is the summation of direct, indirect and induced impacts as defined on page 2. Source: U.S. Economic Census, Annual Survey of Manufacturers’, IMPLAN and Agribusiness Consulting

Economic Contribution of Hardwood Products: United States (Continued)

About the Study

This study investigated the economic contribution from the output of hardwood industries, including sawmills wood preservation, veneer and plywood manufacturing, engineered wood member manufacturing, truss manufacturing, wood window and door manufacturing, cut stock, re-sawing lumber and planing, other millwork (including flooring), wood container and pallet manufacturing, miscellaneous wood product manufacturing, wood kitchen cabinet and countertop manufacturing, upholstered household furniture manufacturing, non-upholstered wood household furniture manufacturing, institutional furniture manufacturing, wood office furniture manufacturing, custom architectural woodwork and millwork manufacturing, showcase, partition, shelving, and locker manufacturing, and blind and shade manufacturing.

IMPLAN Summary Results Table Labor Income GDP Output Impact Type Jobs (#) ($ millions) ($ millions) ($ millions) Direct Effect 748,412 $38,113.1 $49,041.7 $152,593.5 Indirect Effect 612,340 $40,748.7 $62,718.4 $123,891.2 Induced Effect 725,310 $36,942.4 $65,698.9 $117,482.6 Total Effect 2,086,062 $115,804.2 $177,458.9 $393,967.3

Economic Impacts

This study analyzed the economic contribution of the hardwood industry by aggregating three separate impacts: direct, indirect, and induced impacts. Direct impacts are the benefits producers directly received in the form of additional sales. Indirect impacts are realized by businesses supporting the hardwood industry, like industrial loggers and transportation companies. Induced impacts are those created from the spending of labor income and profits and would include, for example, sawmill employees purchasing groceries. For this study, these impacts are aggregated to provide a holistic view of how the hardwood industry supports the United States economy.

Economic Variable Definitions

• Jobs are the total number of jobs supported by the economic activity. • Labor Income is the total value of all employment income, including employee compensation and proprietor income. • Gross Domestic Product (GDP) is the total value added by each step in the supply chain. The GDP can be thought of as the summation of labor income, profit, taxes and indirect business taxes. • Output can be defined as the summation of the business revenues that are associated with the production of hardwood products.

Economic Contribution of Hardwood Products: State of Alabama

Sales of hardwood products added $8.1 billion in value to the Alabama economy in 2016, according to an Agribusiness Consulting study commissioned by the U.S. Hardwood Federation.

Economic Contribution Results • In 2016, Alabama hardwood product output was valued at $4.9 billion • The economic “ripple effects” of these hardwood products supported: o $8.1 billion in economic output, o $3.3 billion in gross state product (GSP), and o 46,478 jobs in the state economy.

For every $1 million in output of hardwood products, 5.7 jobs and $0.40 million of GSP are supported within Alabama.

State of Alabama 2016 Economic Contribution1 Provided by Select Hardwood Products Gross State Jobs Output Sector Product (#) ($ millions) ($ millions) Sawmills 16,081 $1,018.5 $2,710.5 Wood Preservation 2,746 $279.1 $798.6 Rail Ties 269 $27.6 $78.8 Hardwood Veneer and Plywood Manufacturing 4,066 $282.8 $765.2 Engineered wood member (except truss) manufacturing 323 $21.0 $57.8 Truss manufacturing 1,061 $69.1 $190.0 Wood Window and Door Manufacturing 1,444 $112.2 $270.4 Cut Stock, Re-sawing Lumber, and Planing 1,428 $102.4 $256.9 Millwork 2,073 $147.6 $367.5 Flooring 398 $27.7 $69.0 Wood Container and Pallet Manufacturing 2,508 $166.6 $389.6 All other Miscellaneous Wood Product Manufacturing 882 $67.6 $148.0 Wood Kitchen Cabinet and Countertop Manufacturing 8,537 $557.3 $1,228.3 Upholstered Household Furniture Manufacturing 294 $22.7 $57.9 Non-upholstered Wood Household Furniture Manufacturing 1,332 $90.8 $184.7 Institutional Furniture Manufacturing 547 $40.8 $96.1 Wood Office Furniture Manufacturing 371 $36.4 $75.2 Custom Architectural Woodwork and Millwork Manufacturing 353 $27.6 $56.5 Showcase, Partition, Shelving, and Locker Manufacturing 2,317 $205.0 $462.8 Blind and Shade Manufacturing 68 $5.0 $11.9 Total 46,478 $3,252.6 $8,127.9 1 Economic contribution is the summation of direct, indirect and induced impacts as defined on page 2. Source: U.S. Economic Census, Annual Survey of Manufacturers’, IMPLAN and Agribusiness Consulting

Economic Contribution of Hardwood Products: State of Alabama (Continued)

About the Study

IMPLAN Summary Results Table Labor Income GSP Output Impact Type Jobs (#) ($ millions) ($ millions) ($ millions) Direct Effect 21,753 $1,148.8 $1,581.4 $4,963.9 Indirect Effect 14,168 $636.5 $920.4 $1,814.1 Induced Effect 10,555 $401.5 $750.8 $1,349.9 Total Effect 46,478 $2,186.8 $3,252.6 $8,127.9

Economic Impacts

This study analyzed the economic contribution of the hardwood industry by aggregating three separate impacts: direct, indirect, and induced impacts. Direct impacts are the benefits producers directly received in the form of additional sales. Indirect impacts are realized by businesses supporting the hardwood industry, like industrial loggers and transportation companies. Induced impacts are those created from the spending of labor income and profits and would include, for example, sawmill employees buying groceries. For example, sawmill employees purchasing groceries. For this study, these impacts are aggregated to provide a holistic view of how the hardwood industry supports the Alabama state economy.

Economic Variable Definitions

• Jobs are the total number of jobs supported by the economic activity. • Labor Income is the total value of all employment income, including employee compensation and proprietor income. • Gross State Product (GSP) is very similar to GDP and is the total value added by each step in the supply chain. The GSP can be thought of as the summation of labor income, profit, taxes and indirect business taxes. • Output can be defined as the summation of the business revenues that are associated with the production of hardwood products.

Economic Contribution of Hardwood Products: State of Arkansas

Sales of hardwood products added $5.3 billion in value to the Arkansas economy in 2016, according to an Agribusiness Consulting study commissioned by the U.S. Hardwood Federation.

Economic Contribution Results • In 2016, Arkansas hardwood product output was valued at $3.2 billion • The economic “ripple effects” of these hardwood products supported: o $5.3 billion in economic output, o $2.2 billion in gross state product (GSP), and o 28,563 jobs in the state economy.

For every $1 million in output of hardwood products, 5.4 jobs and $0.41 million of GSP are supported within Arkansas.

State of Arkansas 2016 Economic Contribution1 Provided by Select Hardwood Products Gross State Jobs Output Sector Product (#) ($ millions) ($ millions) Sawmills 12,511 $912.2 $2,286.5 Wood Preservation 1,245 $148.9 $393.2 Rail Ties 233 $27.9 $73.6 Hardwood Veneer and Plywood Manufacturing 2,600 $212.7 $529.3 Engineered wood member (except truss) manufacturing 195 $11.7 $34.5 Truss manufacturing 642 $38.4 $113.3 Wood Window and Door Manufacturing 451 $34.9 $85.6 Cut Stock, Re-sawing Lumber, and Planing 1,070 $98.7 $217.5 Millwork 2,182 $195.2 $423.8 Flooring 222 $19.9 $43.1 Wood Container and Pallet Manufacturing 1,370 $88.4 $212.5 All other Miscellaneous Wood Product Manufacturing 381 $25.6 $61.8 Wood Kitchen Cabinet and Countertop Manufacturing 1,436 $77.4 $191.9 Upholstered Household Furniture Manufacturing 997 $71.6 $191.6 Non-upholstered Wood Household Furniture Manufacturing 288 $13.9 $34.5 Institutional Furniture Manufacturing 1,802 $128.4 $310.0 Wood Office Furniture Manufacturing 97 $7.7 $17.9 Custom Architectural Woodwork and Millwork Manufacturing 321 $23.0 $49.4 Showcase, Partition, Shelving, and Locker Manufacturing 733 $62.1 $142.7 Blind and Shade Manufacturing 18 $1.2 $3.1 Total 28,563 $2,172.0 $5,342.3 1 Economic contribution is the summation of direct, indirect and induced impacts as defined on page 2. Source: U.S. Economic Census, Annual Survey of Manufacturers’, IMPLAN and Agribusiness Consulting

Economic Contribution of Hardwood Products: State of Arkansas (Continued)

About the Study

IMPLAN Summary Results Table Labor Income GSP Output Impact Type Jobs (#) ($ millions) ($ millions) ($ millions) Direct Effect 13,102 $602.5 $985.5 $3,210.6 Indirect Effect 9,076 $483.8 $731.6 $1,323.0 Induced Effect 6,385 $237.5 $454.9 $808.7 Total Effect 28,563 $1,323.8 $2,172.0 $5,342.3

Economic Impacts

Economic Variable Definitions

• Jobs are the total number of jobs supported by the economic activity. • Labor Income is the total value of all employment income, including employee compensation and proprietor income. • Gross State Product (GSP) is very similar to GDP and is the total value added by each step in the supply chain. The GSP can be thought of as the summation of labor income, profit, taxes and indirect business taxes. • Output can be defined as the summation of the business revenues that are associated with the production of hardwood products.

Economic Contribution of Hardwood Products: State of Indiana

Sales of hardwood products added $10.9 billion in value to the Indiana economy in 2016, according to an Agribusiness Consulting study commissioned by the U.S. Hardwood Federation.

Economic Contribution Results • In 2016, Indiana hardwood product output was valued at $6.8 billion • The economic “ripple effects” of these hardwood products supported: o $10.9 billion in economic output, o $4.5 billion in gross state product (GSP), and o 64,235 jobs in the state economy.

For every $1 million in output of hardwood products, 5.9 jobs and $0.41 million of GSP are supported within Indiana.

State of Indiana 2016 Economic Contribution1 Provided by Select Hardwood Products Gross State Jobs Output Sector Product (#) ($ millions) ($ millions) Sawmills 4,414 $283.5 $816.6 Wood Preservation 398 $34.9 $113.4 Rail Ties 352 $30.9 $100.5 Hardwood Veneer and Plywood Manufacturing 3,538 $250.7 $718.4 Engineered wood member (except truss) manufacturing 733 $49.8 $134.1 Truss manufacturing 2,408 $163.5 $440.4 Wood Window and Door Manufacturing 2,566 $174.1 $463.5 Cut Stock, Re-sawing Lumber, and Planing 1,009 $69.9 $185.0 Millwork 1,695 $119.3 $301.4 Flooring 1,049 $72.3 $182.5 Wood Container and Pallet Manufacturing 5,176 $318.9 $788.5 All other Miscellaneous Wood Product Manufacturing 2,540 $166.4 $405.9 Wood Kitchen Cabinet and Countertop Manufacturing 17,911 $1,226.1 $2,627.2 Upholstered Household Furniture Manufacturing 4,262 $334.1 $837.7 Non-upholstered Wood Household Furniture Manufacturing 2,488 $171.3 $346.3 Institutional Furniture Manufacturing 1,306 $93.2 $225.9 Wood Office Furniture Manufacturing 6,670 $558.7 $1,256.8 Custom Architectural Woodwork and Millwork Manufacturing 720 $50.0 $109.7 Showcase, Partition, Shelving, and Locker Manufacturing 4,442 $335.6 $838.5 Blind and Shade Manufacturing 910 $58.0 $145.7 Total 64,235 $4,530.3 $10,937.4 1 Economic contribution is the summation of direct, indirect and induced impacts as defined on page 2. Source: U.S. Economic Census, Annual Survey of Manufacturers’, IMPLAN and Agribusiness Consulting

Economic Contribution of Hardwood Products: State of Indiana (Continued)

About the Study

IMPLAN Summary Results Table Labor Income GSP Output Impact Type Jobs (#) ($ millions) ($ millions) ($ millions) Direct Effect 36,008 $1,819.3 $2,265.9 $6,819.8 Indirect Effect 12,403 $709.2 $1,056.9 $2,025.1 Induced Effect 15,825 $683.2 $1,207.5 $2,092.5 Total Effect 64,235 $3,211.7 $4,530.30 $10,937.4

Economic Impacts

Economic Variable Definitions

• Jobs are the total number of jobs supported by the economic activity. • Labor Income is the total value of all employment income, including employee compensation and proprietor income. • Gross State Product (GSP) is very similar to GDP and is the total value added by each step in the supply chain. The GSP can be thought of as the summation of labor income, profit, taxes and indirect business taxes. • Output can be defined as the summation of the business revenues that are associated with the production of hardwood products.

Economic Contribution of Hardwood Products: State of Kentucky

Sales of hardwood products added $5.0 billion in value to the Kentucky economy in 2016, according to an Agribusiness Consulting study commissioned by the U.S. Hardwood Federation.

Economic Contribution Results • In 2016, Kentucky hardwood product output was valued at $3.0 billion • The economic “ripple effects” of these hardwood products supported: o $5.0 billion in economic output, o $1.9 billion in gross state product (GSP), and o 29,297 jobs in the state economy.

For every $1 million in output of hardwood products, 5.9 jobs and $0.38 million of GSP are supported within Kentucky.

State of Kentucky 2016 Economic Contribution1 Provided by Select Hardwood Products Gross State Jobs Output Sector Product (#) ($ millions) ($ millions) Sawmills 8,176 $528.7 $1,438.6 Wood Preservation 703 $57.8 $195.3 Rail Ties 390 $32.5 $109.4 Hardwood Veneer and Plywood Manufacturing 1,469 $101.4 $284.3 Engineered wood member (except truss) manufacturing 198 $12.5 $35.3 Truss manufacturing 651 $41.2 $116.1 Wood Window and Door Manufacturing 341 $23.1 $60.9 Cut Stock, Re-sawing Lumber, and Planing 1,795 $123.4 $324.7 Millwork 2,954 $193.6 $501.1 Flooring 1,827 $118.2 $309.9 Wood Container and Pallet Manufacturing 4,754 $310.5 $730.4 All other Miscellaneous Wood Product Manufacturing 740 $48.0 $116.5 Wood Kitchen Cabinet and Countertop Manufacturing 2,485 $141.8 $337.5 Upholstered Household Furniture Manufacturing 57 $3.1 $10.1 Non-upholstered Wood Household Furniture Manufacturing 366 $18.5 $44.5 Institutional Furniture Manufacturing 366 $33.2 $68.2 Wood Office Furniture Manufacturing 694 $53.9 $126.1 Custom Architectural Woodwork and Millwork Manufacturing 46 $2.4 $6.3 Showcase, Partition, Shelving, and Locker Manufacturing 1,626 $109.7 $290.7 Blind and Shade Manufacturing 47 $2.8 $7.6 Total 29,297 $1,923.8 $5,004.2 1 Economic contribution is the summation of direct, indirect and induced impacts as defined on page 2. Source: U.S. Economic Census, Annual Survey of Manufacturers’, IMPLAN and Agribusiness Consulting

Economic Contribution of Hardwood Products: State of Kentucky (Continued)

About the Study

IMPLAN Summary Results Table Labor Income GSP Output Impact Type Jobs (#) ($ millions) ($ millions) ($ millions) Direct Effect 14,862 $639.1 $748.4 $3,003.4 Indirect Effect 7,051 $384.3 $553.5 $1,005.3 Induced Effect 7,384 $242.3 $621.9 $965.5 Total Effect 29,297 $1,265.7 $1,923.8 $5,004.2

Economic Impacts

Economic Variable Definitions

• Jobs are the total number of jobs supported by the economic activity. • Labor Income is the total value of all employment income, including employee compensation and proprietor income. • Gross State Product (GSP) is very similar to GDP and is the total value added by each step in the supply chain. The GSP can be thought of as the summation of labor income, profit, taxes and indirect business taxes. • Output can be defined as the summation of the business revenues that are associated with the production of hardwood products.

Economic Contribution of Hardwood Products: State of Missouri

Sales of hardwood products added $5.6 billion in value to the Missouri economy in 2016, according to an Agribusiness Consulting study commissioned by the U.S. Hardwood Federation.

Economic Contribution Results • In 2016, Missouri hardwood product output was valued at $3.1 billion • The economic “ripple effects” of these hardwood products supported: o $5.6 billion in economic output, o $2.4 billion in gross state product (GSP), and o 33,162 jobs in the state economy.

For every $1 million in output of hardwood products, 5.9 jobs and $0.42 million of GSP are supported within Missouri.

State of Missouri 2016 Economic Contribution1 Provided by Select Hardwood Products Gross State Jobs Output Sector Product (#) ($ millions) ($ millions) Sawmills 8,802 $611.7 $1,566.7 Wood Preservation 506 $46.4 $138.0 Rail Ties 346 $31.8 $94.6 Hardwood Veneer and Plywood Manufacturing 11 $0.9 $2.2 Engineered wood member (except truss) manufacturing 281 $20.0 $51.1 Truss manufacturing 923 $65.8 $167.7 Wood Window and Door Manufacturing 328 $25.6 $60.5 Cut Stock, Re-sawing Lumber, and Planing 1,280 $90.4 $229.3 Millwork 1,612 $125.2 $288.7 Flooring 997 $77.5 $178.5 Wood Container and Pallet Manufacturing 5,014 $356.3 $794.0 All other Miscellaneous Wood Product Manufacturing 630 $42.5 $100.5 Wood Kitchen Cabinet and Countertop Manufacturing 5,701 $361.9 $805.6 Upholstered Household Furniture Manufacturing 1,661 $121.2 $313.2 Non-upholstered Wood Household Furniture Manufacturing 547 $39.9 $78.1 Institutional Furniture Manufacturing 752 $55.7 $128.8 Wood Office Furniture Manufacturing 545 $41.6 $97.1 Custom Architectural Woodwork and Millwork Manufacturing 679 $45.8 $101.3 Showcase, Partition, Shelving, and Locker Manufacturing 2,876 $224.6 $529.0 Blind and Shade Manufacturing 18 $0.9 $2.7 Total 33,162 $2,354.0 $5,633.2 1 Economic contribution is the summation of direct, indirect and induced impacts as defined on page 2. Source: U.S. Economic Census, Annual Survey of Manufacturers’, IMPLAN and Agribusiness Consulting

Economic Contribution of Hardwood Products: State of Missouri (Continued)

About the Study

IMPLAN Summary Results Table Labor Income GSP Output Impact Type Jobs (#) ($ millions) ($ millions) ($ millions) Direct Effect 16,346 $752.7 $948.6 $3,149.9 Indirect Effect 8,278 $516.2 $749.6 $1,320.9 Induced Effect 8,538 $361.7 $655.8 $1,161.4 Total Effect 33,162 $1,630.6 $2,354.0 $5,633.2

Economic Impacts

Economic Variable Definitions

• Jobs are the total number of jobs supported by the economic activity. • Labor Income is the total value of all employment income, including employee compensation and proprietor income. • Gross State Product (GSP) is very similar to GDP and is the total value added by each step in the supply chain. The GSP can be thought of as the summation of labor income, profit, taxes and indirect business taxes. • Output can be defined as the summation of the business revenues that are associated with the production of hardwood products.

Economic Contribution of Hardwood Products: State of South Carolina

Sales of hardwood products added $4.1 billion in value to the South Carolina economy in 2016, according to an Agribusiness Consulting study commissioned by the U.S. Hardwood Federation.

Economic Contribution Results • In 2016, South Carolina hardwood product output was valued at $2.5 billion • The economic “ripple effects” of these hardwood products supported: o $4.1 billion in economic output, o $1.6 billion in gross state product (GSP), and o 22,281 jobs in the state economy.

For every $1 million in output of hardwood products, 5.5 jobs and $0.40 million of GSP are supported within South Carolina.

State of South Carolina 2016 Economic Contribution1 Provided by Select Hardwood Products Gross State Jobs Output Sector Product (#) ($ millions) ($ millions) Sawmills 6,830 $461.2 $1,165.5 Wood Preservation 1,844 $196.5 $544.2 Rail Ties 210 $22.3 $61.9 Hardwood Veneer and Plywood Manufacturing 3,883 $281.0 $734.6 Engineered wood member (except truss) manufacturing 192 $12.6 $34.2 Truss manufacturing 630 $41.4 $112.3 Wood Window and Door Manufacturing 938 $75.0 $177.1 Cut Stock, Re-sawing Lumber, and Planing 332 $21.7 $58.1 Millwork 692 $51.0 $122.3 Flooring 428 $31.5 $75.6 Wood Container and Pallet Manufacturing 1,751 $103.3 $260.1 All other Miscellaneous Wood Product Manufacturing 941 $69.6 $155.6 Wood Kitchen Cabinet and Countertop Manufacturing 2,329 $156.0 $339.4 Upholstered Household Furniture Manufacturing 99 $7.6 $19.7 Non-upholstered Wood Household Furniture Manufacturing 231 $19.2 $35.5 Institutional Furniture Manufacturing 91 $6.6 $15.9 Wood Office Furniture Manufacturing 47 $5.4 $10.3 Custom Architectural Woodwork and Millwork Manufacturing 157 $12.6 $25.6 Showcase, Partition, Shelving, and Locker Manufacturing 781 $84.9 $170.1 Blind and Shade Manufacturing 85 $5.7 $14.5 Total 22,281 $1,642.6 $4,070.4 1 Economic contribution is the summation of direct, indirect and induced impacts as defined on page 2. Source: U.S. Economic Census, Annual Survey of Manufacturers’, IMPLAN and Agribusiness Consulting

Economic Contribution of Hardwood Products: State of South Carolina (Continued)

About the Study

IMPLAN Summary Results Table Labor Income GSP Output Impact Type Jobs (#) ($ millions) ($ millions) ($ millions) Direct Effect 10,007 $487.6 $779.2 $2,475.0 Indirect Effect 7,228 $344.4 $502.5 $954.8 Induced Effect 5,044 $192.9 $361.0 $640.6 Total Effect 22,281 $1,024.9 $1,642.6 $4,070.4

Economic Impacts

Economic Variable Definitions

• Jobs are the total number of jobs supported by the economic activity. • Labor Income is the total value of all employment income, including employee compensation and proprietor income. • Gross State Product (GSP) is very similar to GDP and is the total value added by each step in the supply chain. The GSP can be thought of as the summation of labor income, profit, taxes and indirect business taxes. • Output can be defined as the summation of the business revenues that are associated with the production of hardwood products.

Economic Contribution of Hardwood Products: State of South Carolina

Sales of hardwood products added $4.1 billion in value to the South Carolina economy in 2016, according to an Agribusiness Consulting study commissioned by the U.S. Hardwood Federation.

For every $1 million in output of hardwood products, 5.5 jobs and $0.40 million of GSP are supported within South Carolina.

Economic Contribution of Hardwood Products: State of South Carolina (Continued)

About the Study

Economic Impacts

Economic Variable Definitions

• Jobs are the total number of jobs supported by the economic activity. • Labor Income is the total value of all employment income, including employee compensation and proprietor income. • Gross State Product (GSP) is very similar to GDP and is the total value added by each step in the supply chain. The GSP can be thought of as the summation of labor income, profit, taxes and indirect business taxes. • Output can be defined as the summation of the business revenues that are associated with the production of hardwood products.

Economic Contribution of Hardwood Products: State of Tennessee

Sales of hardwood products added $6.6 billion in value to the Tennessee economy in 2016, according to an Agribusiness Consulting study commissioned by the U.S. Hardwood Federation.

Economic Contribution Results • In 2016, Tennessee hardwood product output was valued at $3.9 billion • The economic “ripple effects” of these hardwood products supported: o $6.6 billion in economic output, o $2.7 billion in gross state product (GSP), and o 38,435 jobs in the state economy.

For every $1 million in output of hardwood products, 5.8 jobs and $0.40 million of GSP are supported within Tennessee.

State of Tennessee 2016 Economic Contribution1 Provided by Select Hardwood Products Gross State Jobs Output Sector Product (#) ($ millions) ($ millions) Sawmills 8,894 $566.0 $1,543.0 Wood Preservation 360 $35.0 $102.2 Rail Ties 242 $23.5 $68.7 Hardwood Veneer and Plywood Manufacturing 229 $14.8 $43.0 Engineered wood member (except truss) manufacturing 336 $24.5 $61.7 Truss manufacturing 1,102 $80.3 $202.8 Wood Window and Door Manufacturing 1,809 $152.2 $347.4 Cut Stock, Re-sawing Lumber, and Planing 984 $76.5 $184.0 Millwork 2,068 $156.2 $371.0 Flooring 1,041 $78.7 $186.8 Wood Container and Pallet Manufacturing 4,161 $286.7 $655.6 All other Miscellaneous Wood Product Manufacturing 1,378 $93.5 $221.6 Wood Kitchen Cabinet and Countertop Manufacturing 3,494 $218.8 $491.9 Upholstered Household Furniture Manufacturing 7,249 $505.6 $1,351.6 Non-upholstered Wood Household Furniture Manufacturing 1,022 $63.0 $135.0 Institutional Furniture Manufacturing 1,027 $70.4 $171.8 Wood Office Furniture Manufacturing 213 $13.6 $35.8 Custom Architectural Woodwork and Millwork Manufacturing 666 $47.1 $101.2 Showcase, Partition, Shelving, and Locker Manufacturing 2,298 $167.8 $415.2 Blind and Shade Manufacturing 105 $6.2 $17.0 Total 38,435 $2,657.0 $6,638.7 1 Economic contribution is the summation of direct, indirect and induced impacts as defined on page 2. Source: U.S. Economic Census, Annual Survey of Manufacturers’, IMPLAN and Agribusiness Consulting

Economic Contribution of Hardwood Products: State of Tennessee (Continued)

About the Study

IMPLAN Summary Results Table Labor Income GSP Output Impact Type Jobs (#) ($ millions) ($ millions) ($ millions) Direct Effect 19,433 $906.8 $1,129.3 $3,877.0 Indirect Effect 9,778 $515.4 $796.8 $1,501.7 Induced Effect 9,224 $441.9 $730.9 $1,260.1 Total Effect 38,435 $1,864.0 $2,657.0 $6,638.7

Economic Impacts

Economic Variable Definitions

• Jobs are the total number of jobs supported by the economic activity. • Labor Income is the total value of all employment income, including employee compensation and proprietor income. • Gross State Product (GSP) is very similar to GDP and is the total value added by each step in the supply chain. The GSP can be thought of as the summation of labor income, profit, taxes and indirect business taxes. • Output can be defined as the summation of the business revenues that are associated with the production of hardwood products.

TRACKING THE POWER OF RAIL SUPPLY THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S.

September 2018 ABOUT RSI

The Railway Supply Institute (RSI) is a trade association for railway suppliers and manufacturers representing over 200 companies. RSI members are suppliers to North American freight and passenger railroads and their industry segments include mechanical, communications & signaling, maintenance of way and passenger industries. RSI acts on behalf of suppliers to North American freight and passenger railroads and their 100,000 employees to assist members in the global marketplace and represents the industry during the regulatory and legislative process. The U.S. economy depends on the railroads to move freight, and the railroad companies depend on the railway supply industry to facilitate transport. RSI provides strong data-driven advocacy and informed regulatory and legislative support serve critical strategic purposes within the industry.

ABOUT REMSA

Railway Engineering-Maintenance Suppliers Association (REMSA) was created in 1965 by the merger of the Association of Track and Structure Suppliers and the National Railway Appliances Association, two long- standing organizations in the railroad maintenance-of-way industry. The association represents companies and individuals who manufacture or sell maintenance-of-way equipment, products, and services, or are engineers, contractors and consultants working in construction and/or maintenance of railroad transportation facilities. REMSA members constitute a large part of the maintenance-of-way industry. The association sponsors the largest exhibit of maintenance-of-way equipment, products and services in the United States. REMSA members exhibit rail and track products, track maintenance equipment and services, safety devices and software that enables the railroad industry to work smarter.

ABOUT RSSI

Railway Systems Suppliers, Inc. (RSSI) is a trade association serving the communication and signal segment of the rail transportation industry. RSSI’s primary effort each year is to organize and manage a trade show for our members to exhibit their products and services. The association was incorporated in 1966 as the Railway Signal and Communication Suppliers Association Inc. Previous to that time it existed as two separate entities, one for the signal area and one dealing in the communications area of the railroad industry. Although records are vague for the years previous to 1966, there are indications that one or both of these entities were in existence as far back as 1906. In 1972 the corporate name was changed to Railway Systems Suppliers, Inc.

ABOUT RTA

The Railway Tie Association (RTA) was organized in 1919. Predecessor groups, dating back to the late 1800s, that included The National Association of Railroad Tie Producers, were formed to support the railroad tie industry and to preserve the forest through conservation. The purpose of the RTA is to promote the economical and environmentally sound use of wood crossties. The Association is involved in research into all aspects of the crosstie industry and ongoing activities dealing with sound forest management, conservation of timber resources, timber processing, wood preservation, industry economics and statistics, and safety of industry workers.

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 2 ABOUT OXFORD ECONOMICS

Oxford Economics was founded in 1981 as a commercial venture with Oxford University’s business college to provide economic forecasting and modeling to UK companies and financial institutions expanding abroad. Since then, we have become one of the world’s foremost independent global advisory firms, providing reports, forecasts, and analytical tools on 200+ countries, 250 industrial sectors, and over 4,000 regions. Our best- of-class global economic and industry models and analytical tools give us an unparalleled ability to forecast external market trends and assess their economic, social, and business impact.

Headquartered in Oxford, England, with regional centers in London, New York, and Singapore, Oxford Economics has offices across the globe in Belfast, Chicago, Dubai, Miami, Milan, Paris, Philadelphia, Sydney, and Tokyo. We employ over 300 full-time people, including more than 200 professional economists, industry experts, and business editors—one of the largest teams of macroeconomists and thought leadership specialists. Our global team is highly skilled in a full range of research techniques and thought leadership capabilities, from econometric modeling, scenario framing, and economic impact analysis to market surveys, case studies, expert panels, and web analytics. Underpinning our in-house expertise is a contributor network of over 500 economists, analysts, and journalists around the world.

Oxford Economics is a key adviser to corporate, financial and government decision-makers, and thought leaders. Our worldwide client base now comprises over 1,500 international organizations, including leading multinational companies and financial institutions; key government bodies and trade associations; and top universities, consultancies, and think tanks.

September 2018

This report is confidential and proprietary to the Railway Supply Institute (RSI) and may not be published or distributed without their prior written permission. For reference purposes, please use the following citation: ‘Tracking the Power of Rail: The Economic Impact of Railway Suppliers in the U.S., commissioned by the Railway Supply Institute and conducted by Oxford Economics, 2018.’

The modeling and results presented here are based on information provided by third parties, upon which Oxford Economics has relied in producing its report and forecasts in good faith. Any subsequent revision or update of those data will affect the assessments and projections shown.

To discuss the report further, please contact:

Hamilton Galloway Head of Consultancy, Americas, Oxford Economics 5 Hanover Square, 8th Floor, New York, NY, 10004 Tel: 646-503-3068 Email: [email protected]

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 3 CONTENTS

1. INTRODUCTION ��8

2. The GDP Impact of Railway Suppliers �� 10

3. The Employment Impact of the Railway Suppliers . . 15

4. Tax Impact of Railway Suppliers �� 20

5. State-Level Detail �� 23

6. CONCLUSION ��26

APPENDIX A ��27

APPENDIX B ��29

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 4 EXECUTIVE SUMMARY

From rail cars and tracks to signals and switches, the railway supply industry has been a vital and dynamic part of the U.S. economy for over $74.2 billion 200 years. Railway suppliers play an essential role in supporting the rail system Total contribution of the here in the U.S. and have done so since the origin of railroads in the U.S. in the railway supply industry early 1800’s. In 2017, the North American railroad system comprised more than to U.S. GDP in 2017. 1.6 million railcars powered by more than 38,000 locomotives over more than 140,000 miles of rail. Nearly every piece of this intricate puzzle was shaped and Some $54.3 billion of this put into place by railroad suppliers for their railroad customers. came from supply chain and Today, the rail industry is leading the transportation world in technological consumer spending activities advancements and has embraced digitization and the Internet of Things in the wider U.S. economy. (IoT). Such technology has generated significant improvements in operational safety and network efficiency and much of it was developed and driven by the railway supply community.

Beyond this support of the railroad system, the railway supply and manufacturing industry is essential to the national economy—generating 650,000 jobs value for the economy, stimulating jobs, and contributing taxes. These Supported in 2017. economic effects can be measured using a standard technique known as economic impact analysis. This kind of analysis measures not just the direct This includes the 125,100 (operational) contribution of the railway supply industry but also the impact that jobs that are directly provided is felt as its activities ripple out across the economy. This includes the impact in the railway supply industry generated as railway suppliers make purchases from a wider supply chain, in the U.S. known as the indirect impact. It also measures the effects that are felt in the wider consumer economy as employees in the railway supply industry and their supply chains spend their wages on housing, transportation, medical care, and entertainment (known as the induced impact). This report quantifies all three channels of impact in terms of their contribution to national GDP, jobs, income, $16.9 billion and of tax revenue that is generated for all levels of government. Railway supply sector’s The economic contribution of the railway supply industry in 2017 total tax contribution amounted to more than $74.2 billion in GDP, as well as $16.9 billion in in 2017 taxes to local, state and federal governments. Workers in the industry are highly productive, and wages reflect this at $78,800 annual income on average, This was made up of $10.7 placing them well above the median income earners in most states.1 billion in federal taxes and $6.2 billion in state and In total, the railway supply industry supported more than 650,000 jobs local taxes. in 2017. Railway suppliers directly employ more than 125,000 employees in

1 By comparison, according to BLS’ QCEW, the average income in the United States is approximately $55,400 in 2017.

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 5 manufacturing, repair, maintenance, and leasing, among others. In addition, for each worker directly employed by the railway supply industry, a further 4.2 jobs are supported in the wider economy, either in the supply chains of railway suppliers or through the wage spending of those employed by the firms themselves or their supply chains. On average, these indirect and induced jobs pay an average annual salary of $63,980.

The railway supply industry makes a widespread contribution throughout the U.S. economy. Of the $74.2 billion total contribution to GDP, some $54.3 billion results from supply chain and consumer spending activities. This spreads the benefits of the industry to other parts of the U.S. economy, including, for example, $10.4 billion in trade, transportation, and utilities; $7.3 billion in professional and business services; and $8.2 billion in natural resources and mining.

While the railway supply industry has a substantial impact in every U.S. state, the largest impact is felt in the Southwest states ($18.1 billion), followed closely by the Southeast region ($15.9 billion), and the Great Lakes region ($12.3 billion). The states where railway supply firms made the greatest total contribution to the economy in 2017, include Texas ($15.1 billion), California ($6.1 billion), Illinois ($5.0 billion), Pennsylvania ($3.7 billion), and New York ($3.1 billion).

Fig. 1. Economic impact of railway supply on the U.S., 2017

TOTAL

INDUCED

INDIRECT

DIRECT Income GDP (U.S.$, billions) 43.4 14.1 19.5 9.9 19.9 29.8 24.6 74.2 (U.S.$, billions) 125,100

252,100

272,100

650,000

Employment

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 6 GLOSSARY OF TERMS

American Community Survey (ACS): An annual household survey conducted by the U.S. Census Bureau that samples about 3.5 million addresses across the U.S. It provides information on individual socioeconomic and demographic characteristics.

County Business Patterns (CBP): A U.S. Census program that measures subnational economic data by industry. This series includes the number of establishments, employment during the week of March 12, first quarter payroll, and annual payroll.

Gross Domestic Product (GDP): Produced by the Bureau of Economic Analysis (BEA), GDP is the official economic measure of output in the U.S. economy.

Gross Value Added (GVA): A measure of output less intermediate consumption (contribution to GDP), it is the measure of the value of goods and services produced in a specified region.

IMPLAN: Economic impact software that uses Input-Output tables showing the relationships between industries to evaluate the full economic contribution of one industry throughout the economy.

Metropolitan Statistical Area (MSA): A geographic region in the U.S., defined by the Office of Management and Budget, to identify a single set of geographic delineations for the Nation's largest centers of population and activity (i.e., cities).

NAICS: The North American Industry Classification System (NAICS) is the standard used by Federal statistical agencies in classifying business establishments for the purpose of collecting, analyzing, and publishing statistical data related to the U.S. business economy.

Occupational Employment Statistics (OES): A Bureau of Labor Statistics (BLS) program that produces employment and wage estimates annually for over 800 occupations.

Quarterly Census of Employment and Wages (QCEW): A Bureau of Labor Statistics (BLS) program that publishes a quarterly count of employment and wages reported by employers covering 98 percent of U.S. jobs.

Standard Occupational Classification (SOC):A system used by Federal statistical agencies to classify workers into occupational categories for the purpose of collecting, calculating, or disseminating data. All workers are classified into one of 840 detailed occupations according to their occupational definition.

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 7 1. INTRODUCTION

Railroads originated in the United States in the early 1800’s. Since the first locomotive was manufactured and the first tracks laid, railway suppliers have 140,000 been hard at work helping the U.S. to grow its geographic footprint and its Miles of rail in economy. Today, the North American railroad system comprises more than North America. 1.6 million railcars powered by more than 38,000 locomotives over more than 140,000 miles of rail. Nearly every piece of this intricate puzzle was shaped Source: AAR Railroad Facts, 2017 Edition and put into place by railroad suppliers for their railroad partners. We depend on our railroads to move most of our freight most efficiently, and our railroads depend on the railway supply industry.

With the help of the railway supply industry, U.S. railroads moved $1.6 billion in revenue ton-miles in 2016 and 2.5 million passengers in 2017. The railroads 38,000 success has helped drive growth in the railway supply industry. The railway Locomotives moving supply industry is substantial, directly contributing $19.9 billion towards GDP passengers and freight and supporting over 125,100 jobs in 2017. However, the economic contribution throughout the continent. of the railway supply industry extends far beyond the plants where their products are manufactured. The large demand for all types of rail products facilitates the need for additional support services including leasing services; distribution and logistics; and maintenance and repair services. These support activities generate additional economic value throughout the U.S. economy.

Despite this extensive economic activity, no comprehensive economic analysis has ever been developed to document the overarching impact of the railway supply industry on the U.S. economy. Until now, we have lacked comprehensive economic data representing the diverse field of suppliers. To address this, RSI, RSSI, RTA, and REMSA, representing nearly 4,000 corporate member companies in the industry, commissioned Oxford Economics to conduct research, analysis, and impact modeling to clearly quantify the economic contribution of railway suppliers in the U.S.

The membership, and the industry more generally, as defined in this study, comprises a diverse group of organizations. It includes manufacturers, component suppliers, leasing companies, logistics providers, and financial institutions.

For this study, Oxford Economics has quantified the economic contribution of the railway supply industry using an economic impact analysis at the national level and by state, as set out in following the page. This technique highlights the importance of the railway supply industry to the U.S. economy in terms of jobs, wages, tax revenue, and GDP.

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 8 AN INTRODUCTION TO ECONOMIC IMPACT ANALYSIS

A standard economic impact assessment identifies three channels of impact that stem from an activity:

• Direct effect, which measures the economic benefit of railway supply operations and activities in the U.S.

• Indirect effect,which encapsulates the activity driven by the supply chain as a result of the procurement of goods and services from other businesses.

• Induced effect,which captures the impact of workers spending their wages on locally produced goods and services. This supports activity across the spectrum of consumer goods and services, and their supply chains. An example of this is the purchases a worker makes spending his wages on groceries, clothing, transportation, and utilities.

In accordance with standard economic impact assessments, the scale of the railway supply industry is measured using four key metrics:

• GVA—the gross value added (GVA) contribution to GDP.

• Employment—employment is measured in terms of headcount of workers.

• Wages—the compensation paid to workers within the industry, the industry’s supply chain and induced wages paid to workers in consumer industries.

• Taxes—gross tax receipts paid at federal, state and local levels.

All monetary impacts in this report are presented in current 2017 (i.e. non- inflation adjusted) US$.

Fig. 2: The channels of economic impact

DIRECT INDUCED TOTAL IMPACT IMPACT IMPACT Company/ INDIRECT Consumer Value-added Industry spending out Employment Expenditure IMPACT of employees’ wages: Taxes Purchases of Food and inputs from beverages suppliers Recreation Suppliers’ own supply chains Clothing Household goods THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 9 2. THE GDP IMPACT OF RAILWAY SUPPLIERS

Railway suppliers have a considerable economic footprint in the U.S. More than 125,000 people work in the industry, designing, manufacturing, distributing, $74.2 billion servicing, and operating equipment for railways throughout all states in the GDP contribution U.S. The purchases made by the railway supply industry from suppliers during in 2017. the manufacturing process (i.e. the indirect effects) enable further activity throughout the U.S., sustaining thousands of additional jobs across the This is made up of direct, country. Finally, wages paid to employees, and those employed in the supply indirect and induced effects chain, fund consumer spending (i.e. the induced effects), for example in retail as the impact of railway and leisure establishments, and deliver additional economic benefit to the U.S. suppliers spreads through the In the following section, we quantify the industry’s economic footprint in terms U.S. economy. of its contribution to GDP, the employment it supports and the tax revenues it generates at the federal, state and local level. In this section, we explore the three core channels of impact, starting with the direct contribution of the railway supply industry.

2.1 GDP IMPACT OF THE RAILWAY SUPPLY INDUSTRY

Combining all the channels of impact—direct, indirect (supply chain) and induced (wage spending)—the total impact of the railway supply industry on the U.S. economy amounted to $74.2 billion in 2017, equivalent to about 0.4 percent of the total U.S. economy (note: U.S. nominal GDP was approximately $18 trillion in 2017). The chart below shows the breakdown of this impact across the three core channels, in terms of GVA contribution to GDP.

Fig. 3. The total GVA contribution of railway suppliers, 2017

billions of U.S.$ 80 74.2

60 24.6

40 29.8

20 19.9 0 Direct Indirect Induced Total

Source: Oxford Economics, IMPLAN

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 10 For scalability and comparison, if the railway supply industry were represented as a U.S. city, the industry would rank as the 47th largest MSA in terms of GDP. 47th It would fall between Louisville, KY and Jacksonville, FL. Fig. 4 illustrates this comparison, along with similar sized MSAs in terms of GDP. We subsequently If the railway supply industry explore each channel of impact in turn. were represented as a U.S. city, the industry would rank as the 47th largest MSA.

It ranks alongside Louisville, Fig. 4. MSA comparison of the railway supply GDP contribution

KY and Jacksonville, FL in MSA GDP terms of in GDP. GDP, in billions of U.S.$

Providence, RI 80.2

Raleigh, NC 79.8

New Orleans, LA 77.2

Louisville, KY 75.0

Railway supply industry 74.2

Jacksonville, FL 71.5

Memphis, TN 71.5

Oklahoma City, OK 70.2

Honolulu, HI 64.8

Source: BEA, Oxford Economics

2.2 DIRECT GDP IMPACT

The direct impact of railway suppliers comprises the value-added output generated by the industry; those employed directly by railway suppliers, the wages these railway suppliers pay, their operational expenditures, and the taxes that they pay. We estimate railway suppliers directly accounted for $19.9 billion in GDP, of which $8.4 billion was employee compensation.

A comparison of the total impact with the direct impact reveals how, for every $100 of value-added output created by the railway supply industry, a further $270 of value added is created in other industries of the U.S. economy as a result of supply chain and employee expenditure impacts. This means that the industry has a value-add multiplier impact of 3.7, which is equivalent to that of the aluminum rolling, drawing and extruding industry, and just below that for Federal electric utilities, and far exceeds that for legal services, for example.

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 11 2.3 INDIRECT GDP IMPACT

The indirect impact of the railway supply industry reflects the employment and $29.8 billion GDP contribution made by the suppliers of those establishments (e.g. steel Contribution to GDP from manufacturers, loggers, and IT services) and, in turn, within the supply chains supply chain purchases of those suppliers. In 2017, the GDP contribution of these suppliers was $29.8 (indirect) billion, of which $14.6 billion was employee compensation. in 2017. $24.6 billion 2.4 INDUCED GDP IMPACT Contribution to GDP The induced impact of the railway supply industry represents the economic from consumer spending activity supported by the consumer spending of wages by those employed (induced) directly by railway suppliers or in their supply chains. As a result of the in 2017. railway supply firms and their suppliers’ employees spending their wages in the economy, we estimate the induced impact that is attributable to railway supply firms’ operations to be a $24.6 billion contribution to GDP in 2017. This includes $12.1 billion in employee compensation.

2.5 GDP IMPACT BY INDUSTRY

The economic impact of railway suppliers’ activities is spread throughout the economy as the employees and suppliers of the railway supply industry spend their incomes purchasing goods and services from all types of other businesses including restaurants, power companies, health care services, etc. The impact at the industry level is calculated using an input-output modeling framework. These inter-industry relationships are used to calculate the multipliers, or the ripple effects of railway suppliers’ activities, which, in turn, support activity in other industries of the economy.

The total GDP impact (direct + indirect + induced) of the railway supply industry is displayed in Fig. 5. It is broken down into the major industries of the U.S. economy. Railway suppliers’ direct impact is concentrated in the manufacturing and the finance, insurance, and real estate sector (sales and leasing activities). Not surprisingly, these two industries (manufacturing and finance, insurance, and real estate) are the industries where railway suppliers have the greatest overall national impact of $33.7 billion in 2017. In total, 45 percent of the railway supply industry’s overall gross value added (GVA) impact is captured in these two sectors alone.

Still, the remaining 55 percent of railway suppliers’ GVA impact is generated in a diverse set of industries outside of manufacturing and finance. Outside of those mentioned already, there are three industries where railway suppliers have a significant impact: trade, transportation, and utilities (14 percent); professional and business services (12 percent); and natural resources and mining (11 percent). To provide some examples, the top inputs (i.e. indirect impacts) for railway suppliers’ operations include:

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 12 • $537.3 million spent on commercial logging (part of natural resources and mining);

• $3.2 billion spent on wholesale trade (part of trade, transportation, and utilities);

• $805.9 million spent on real estate (part of finance, insurance, and real estate); and

• $458.9 million spent on plate work manufacturing (part of manufacturing).

These supply chain purchases demonstrate the sheer size and purchasing power of the railway supply industry. In fact, the railway supply industry ranks as the 12th largest purchaser of iron and steel forgings in the U.S. Similarly, some of the top expenditures for consumers (i.e. induced impacts) include:

• $2.4 billion spent on housing (part of finance, insurance, and real estate);

• $839.5 million spent at restaurants (part of finance, insurance, and real estate); and

• $971.2 million spent on hospital care (part of education and health services).

Fig. 5. Railway Suppliers’ GVA impact by industry, 2017

Industry Direct Indirect Induced Total

$ in billions

Natural Resources and Mining 0.0 7.6 0.5 8.2

Construction 2.3 0.4 0.2 2.9

Manufacturing 13.4 5.7 2.1 21.2

Trade, Transportation, and Utilities 0.3 5.9 4.5 10.7

Information 0.0 0.9 1.2 2.2

Finance, Insurance, and Real Estate 2.3 3.3 7.0 12.6

Professional and Business Services 1.5 4.7 2.6 8.8

Education and Health Services 0.0 0.0 3.4 3.4

Leisure and Hospitality 0.0 0.6 1.6 2.2

Other Services 0.0 0.4 1.1 1.5

Government - 0.3 0.3 0.6

Total 19.9 29.8 24.6 74.2

Source: IMPLAN, Oxford Economics

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 13 CASE STUDY 1: POSITIVE TRAIN CONTROL IMPLEMENTATION

The Rail Safety Improvement Act of 2008 mandated the implementation of Positive Train Control (PTC) as a safety system for the rail sector in order to “prevent train-to-train collisions, over-speed derailments, incursions into established work zone limits, and the movement of a train through a switch left in the wrong position.”2 PTC is an intricate system of systems encompassing four major areas: on-board locomotive, wayside signal, back-office software, and communications. Railway suppliers have been heavily involved in the design, manufacturing, and installation of PTC equipment across the country.

In total, 41 railroads are required to install PTC systems and data reported to the U.S. Department of Transportation (DOT) indicates that PTC systems are in operation on 65 percent (37,705 route miles) of the required route miles of track, as of June 30, 2018.3 Congress has set an installation deadline of December 31, 2018, and an additional 2 years for railroads to fully implement PTC, and the railway supply industry is fully committed to meeting this mandate and customer requirement.

INCREASING SAFETY

PTC technology will help avoid future train accidents and provide a platform for other technology enhancements for both freight and passenger railroads alike. When it is fully implemented, the PTC system will have information on the location, speed, and direction for trains across much of the country’s railroad system. Using real-time data, the PTC system will be able to automatically slow a train if, for example, an engineer misses a signal and does not reduce a train’s speed around a sharp curve. In order to accomplish this safely, PTC must account for several factors including: train size, locomotive and rail car mix, speed, terrain, and signal aspects to determine safe stopping distances.

INVESTING IN RESEARCH AND DEVELOPMENT

Railway suppliers are working with railroads to explore new ways that PTC systems can be leveraged to develop new products and services that enhance safety or efficiency of railroad operations in new ways. With the support of DOT and FRA, a PTC testbed was constructed in Pueblo, Colorado, where rail suppliers can review designs, witness testing, monitor performance and evaluate PTC systems for type approval.4 Additional PTC supported technologies could drive increased fuel efficiency or improved diagnostics for rail equipment, thereby decreasing maintenance and repair costs.

CREATING VALUE AND JOBS

Railroads have invested approximately $10 billion over the last decade to develop and implement positive train control technology. There are more than 400,000 components in the entire PTC system that need to be designed, built, tested, and installed across 140,000 miles of rail in the U.S. As a result, railway supply employees across the country are working every day to help railroads meet the PTC mandate, which requires the installation of hardware and initiation of line-of-road testing by the end of 2018 unless an alternative schedule is granted, and full PTC implementation and interoperability by the end of 2020.

2 110th Congress. (Oct. 16, 2008). Federal Rail Safety Improvements Public Law 110–432. Federal Railroad Administration. 3 See https://railroads.dot.gov/newsroom/fra-publishes-railroads-quarter-2-ptc-data. 4 See https://www.transportation.gov/briefing-room/background-positive-train-control-enforcement-and-implementation- act-2015.

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 14 3. THE EMPLOYMENT IMPACT OF THE RAILWAY SUPPLIERS

In addition to its GDP impact, the railway supply industry directly employed 125,100 workers in 2017. The railway supply industry also indirectly supported 5.2 an additional 252,768 jobs through supply-chain purchases. We estimate that Jobs multiplier of the a further 272,152 induced jobs were sustained as employees of the railway railway supply industry. supply industry and its supply chain spent their wages on consumer goods. In total, therefore, we find that the economic activity of the railway supply industry For every direct job in the supported more than 650,000 jobs throughout the U.S. economy in 2017. industry, an additional 4.2 Different industries affect the U.S. economy in different ways. The best way to jobs are supported elsewhere compare is by evaluating jobs and value-add multipliers. The railway supply in the economy. industry has a jobs multiplier of 5.2. This means that for every direct job in the industry, an additional 4.2 jobs are supported elsewhere in the economy. This is higher than many other industries. The Fig. 6 displays the job and value-add multiplier of different industries in the U.S.

Fig. 6. Multipliers of railway suppliers compared to other industries

Industry Jobs Multiplier Value-Add Multiplier

Plastics material and resin manufacturing 6.9 4.3

Cable and other subscription programming 5.7 1.9

Aluminum sheet, plate, and foil manufacturing 5.2 4.3

Railway supply industry 5.2 3.7

Water transportation 4.8 2.8

Surgical and medical instrument manufacturing 2.7 1.9

Legal services 1.5 1.3

Home health care services 1.1 1.3

Source: IMPLAN, Oxford Economics

3.1 JOBS IMPACT BY INDUSTRY

The total employment impact (direct + indirect + induced) of the railway supply industry is displayed in Fig. 7 and Fig. 8 (below). Similar to the GVA impact, the industry’s employment impact is concentrated in the manufacturing industry,

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 15 which accounts for 18 percent of the total employment impact. This is followed Diverse Job by professional and business services (17 percent); trade, transportation, and Creation: utilities (16 percent); and finance, insurance, and real estate (11 percent). 82% of all jobs supported by Fig. 7. Total railway supply jobs impact by industry the railway supply industry are in industries other than Jobs, in thousands 9+6+18+16+1+11+17+9+8+5+1 manufacturing. Natural Resources and Mining 59.3 Construction 40.2 Manufacturing 114.0 Trade, Transportation, and Utilities 101.5 Information 8.9 Finance, Insurance, and Real Estate 71.5 Professional and Business Services 108.6 Education and Health Services 55.7 Leisure and Hospitality 53.8 Other Services 30.6 Government 5.9

Source: Oxford Economics, IMPLAN

Fig. 8. Detail railway suppliers’ jobs impact by industry

Industry Direct Indirect Induced Total

Jobs, in thousands

Natural Resources and Mining 0.0 52.8 6.4 59.3

Construction 31.1 5.8 3.3 40.2

Manufacturing 54.5 46.4 13.1 114.0

Trade, Transportation, and Utilities 3.5 43.5 54.5 101.5

Information 0.2 4.1 4.7 8.9

Finance, Insurance, and Real Estate 18.0 21.2 32.3 71.5

Professional and Business Services 17.1 57.3 34.1 108.6

Education and Health Services 0.1 0.1 55.6 55.7

Leisure and Hospitality 0.3 13.8 39.7 53.8

Other Services 0.2 5.0 25.4 30.6

Government - 2.8 3.1 5.9

Total 125.1 252.8 272.2 650.0

Source: Oxford Economics, IMPLAN

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 16 3.2 OCCUPATIONAL PROFILE

Workers in the railway supply industry are highly productive, and wages reflect 24% this at $78,800 annual income on average, placing them well above the median Share of production income earners in most states.5 In this section we examine the occupation workers in the railway profile of the industry to get a better sense of the types of skills and knowledge supply industry. that workers need to be employed in the railway supply industry.

Top employing occupations The occupation profile of the railway supply industry describes the types of in the railway supply industry jobs that make up the industry.6 The roles and responsibilities of railway supply include assemblers and industry employees are many and varied. They are assemblers and fabricators, fabricators, maintenance and maintenance and repair workers, metal and plastic workers, logisticians, repair workers, electricians, management analysts, software developers, engineers, electricians, and industrial machinery procurement clerks, stock clerks and order fillers, and industrial machinery mechanics, among others. mechanics, among others. The major occupation group that has the largest share of employment within the industry is production occupations, which accounts for about 24 percent of workers in the industry (see Fig. 9).

Beyond the production capacity the railway supply industry provides, several other functions are essential to the operations of railway suppliers, including construction and extraction occupations that comprise about 16 percent of workers, office and administrative support occupations that make up about 14 percent, as well as transportation and material moving occupations, which account for about 9 percent of workers in the railway supply industry.

Fig. 9. Occupation profile of railway suppliers

Production 8% Construction and Extraction 4% 4% 24% Office and Administrative Support Transportation and Material Moving 6% Business and Financial Operations Installation, Maintenance, and Repair 7% Management 16% 8% Sales and Related Architecture and Engineering 9% 14% All Other Source: Oxford Economics, BLS OES 24+16+1498+7+64t 5 By comparison, according to BLS’ QCEW, the average income in the United States is approximately $55,400 in 2017. 6 This profile represents the occupation staffing patterns of the respective industries that comprise the railway supply industry. For more detail, see https://www.bls.gov/oes/current/oessrci.htm.

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 17 3.3 PEOPLE WHO WORK IN THE RAILWAY SUPPLY INDUSTRY

This section considers the socioeconomic characteristics of the railway supply industry. The data come from the 2016 American Community Survey (ACS), the most recently available data. It includes all workers currently employed in the railway supply industry as well as a comparison to all employed workers in the U.S.

Workers in the railway supply industry are likely to be older compared to the U.S. workforce overall. Indeed, 46 percent of the railway supply workforce was over the age of 45, reflecting length of tenure within the industry as well as industry knowledge. But as the older cohort approaches retirement age, the railway supply industry will need to prepare and recruit for the future workforce.

Fig. 10. Age profile of the railway supply industry

Under 30 30–44 45–59 60+

0% 20% 40% 60% 80% 100%

Railway suppliers 20020.0% +33733.7% +34834.8% +11611.6%= U.S. total employed 24424.4% +31831.8% +31331.3% +12512.5%=

The railway supply industry shows fewer college degrees compared to all other industries. This, however, highlights how the railway supply industry 38% is an increasingly rare example of a thriving blue-collar industry, in which degree educated opportunities exist for workers to gain skills and earn family-sustaining wages.

62% of railway supply workers do not have a Fig. 11. Educational attainment in the railway supply industry college degree. HS or below Some college College degree

0% 20% 40% 60% 80% 100%

Railway suppliers 40940.9% +21521.5% +37637.6% = U.S. total employed 34034.0% +22922.9% +43143.1% =

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 18 The railway supply industry workforce has a greater share of veterans compared to the U.S. workforce overall. This indicates that there may be a strong alignment between the skills veterans learn during military services and the skills required to work in the industry, such as teamwork and problem solving, or operating in a busy manufacturing environment or warehouse space while using highly technical equipment. As the railway supply industry workforce ages, this could provide a useful pool of talent to recruit and replace the retiring workforce.

Fig. 12. Veteran status in the railway supply industry

0% 2% 4% 6% 8% 10%

Railway suppliers 7907.9% = U.S. total employed 6406.4% =

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 19 4. TAX IMPACT OF RAILWAY SUPPLIERS

The direct, indirect, and induced economic activity supported by the railway supply industry generated $10.7 billion in federal tax revenue in 2017 and an $16.9 billion additional $6.2 billion in state and local tax revenue. In total, the economic Fiscal contribution activity that the railway supply industry generated was worth over $16.9 billion in 2017. in taxes for all levels of government. In total, each job created by the industry’s activity results in approximately $26,000 in additional tax revenue (from all This was made up of sources). $10.7 billion in federal taxes and $6.2 billion in state and local taxes. Fig. 13. Railway supplier tax impact, in billions of U.S.$, 2017

State and Local Taxes $6.2

Federal Taxes $10.7

Source: IMPLAN, Oxford63+ Economics 37+t 4.1 COMPARING THE TAX IMPACTS OF OTHER INDUSTRIES

Different industries impact the U.S. economy in different ways as we detailed in our discussion of multipliers in Section 3. Similarly, the tax contributions of different industries can vary depending upon many factors such as geographic concentration (i.e. state sales tax), tax policies (i.e. urban enterprise or free trade zones), and depreciation rates across different types equipment. Using industries with similarly sized output as the railway supply industry, we highlight the tax contributions in Fig. 14 below.

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 20 Fig. 14. Tax contributions of similarly sized industries in the U.S.

Direct GVA Tax contribution Industry (in billions) (in billions)

Railway suppliers $19.9 $16.9

Support activities for oil and gas operations $39.3 $5.2

Nonalcoholic beverage manufacturing $13.4 $14.8

Surgical and medical instrument manufacturing $18.6 $6.5

Water transportation $18.7 $11.8

Home health care services $59.0 $5.2

Source: IMPLAN, Oxford Economics

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 21 CASE STUDY 2: PRESERVING FAIR AND FREE MARKETS

Since the North American Free Trade Agreement (NAFTA) between Canada, Mexico, and the United States was put in place on January 1, 1994, trade and investment have increased between each country. One of the key drivers for this success has been the ability of companies and industries to integrate their supply chains across the continent to maximize efficiencies, costs, and access to resources – and railroads and rail suppliers have played an important role in this.

Railroad networks are highly integrated, and customers across nearly every industry rely on rail service to meet their logistics and supply chain needs. Meanwhile the production of goods has become so circuitous that the lines of “American made”, “Canadian made”, or “Mexican made” are blurred in highly integrated continental supply chains. Even basic inputs, such as oil imported from Mexico, have wide-reaching value-added activities beyond the energy sector – as expressed by Christopher Wilson in a report for the Wilson Center:

“Mexican oil, for example, might be sent to the United States to be refined and turned into raw plastic in Louisiana, before being sent to an injection molder in the U.S. Midwest that creates the components for a car’s dashboard. Those parts might return to Mexico for assembly at a factory along the border and then used in the final production of a car in the Bajío.”

RAIL SUPPLIERS HAVE INTEGRATED SUPPLY CHAINS

As noted above, NAFTA has facilitated an extensively integrated supply chain in Canada, Mexico, and the U.S. For example, 40% of U.S. imports from Mexico and about 75% of U.S. exports to Mexico are in intermediate goods. Manufacturers of railway supply products – locomotives, railcars, maintenance of way equipment – often source components from all three NAFTA nations, sustaining thousands of job across the continent.

RAIL TRANSPORTATION SUPPORTS TRADE

Since NAFTA was approved in the mid-90s, trade has grown dramatically (Canada and Mexico accounted for nearly 26 percent of total US imported goods in 2016), making rail networks even more integral to the smooth flow of goods and services among the three NAFTA nations. The Association for American Railroads (AAR) estimates that international trade accounted for $26.4 billion of rail revenue in 2014; that is a result of freight cars moving nearly 511 million tons of goods. In March of 2017, at least 42 percent of rail carloads and intermodal units, and more than 35 percent of annual revenue, are derived from international trade.7

REGIONAL IMPACTS

The most important country for the supply of Mexican production is the United States. This illustrates the two- way nature of supply chains and suggests trade protection has the potential to come back to bite U.S. producers. The supply chains of rail suppliers, notably in manufacturing, would be dramatically impacted if the ongoing NAFTA negotiations were to fail. Among the states whose economies rely most heavily on trade with Canada and Mexico, four of the top five—Texas, North Dakota, Kentucky, and Indiana—have a high reliance on the railway supply industry, as indicated by their respective location quotients.8

7 https://www.aar.org/wp-content/uploads/2017/12/AAR-Freight-Railroads-International-Trade-Report-March-2017.pdf 8 The exception is Michigan. See Section 5.2 of this report for more detail on location quotients.

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 22 5. STATE-LEVEL DETAIL

There are two ways to evaluate state-level detail. One is measuring the magnitude of the total GVA impact in each state. The other considers the relative contribution of the railway supply industry to each state’s economy, using a measure called location quotient. Each measure is detailed in the following sections.

5.1 GVA IMPACTS BY STATE

Railway supply firms have operations in all 50 states throughout the U.S. and Railway suppliers have are represented by manufacturers, leasing firms, maintenance companies, and the largest impact in the many other industry segments. These firms have a substantial concentration Southwest states. in Southwest states, as indicated by the region’s location quotient of 2.0. As a result, railway suppliers make a disproportionately large impact in this The top 5 states, in terms region. Overall, the largest impact is felt in the Southwest states ($18.1 billion), of GVA, account for 45% followed closely by the Southeast region ($15.9 billion), and the Great Lakes of railway supply economic region ($12.3 billion).9 impact nationwide.

9 Regions, as determined by the Bureau of Economic Analysis (BEA). For a detailed list of states by region, see https://www.bea.gov/regional/docs/regions.cfm.

Fig. 15. Railway supply industry GVA impacts by state

1.4 VT – 0.1 0.2 0.3 0.4 1.0 0.2 – NH 1.4 0.8 – MA 1.1 3.1 0.3 0.1 0.1 – RI 0.3 1.4 0.5 – CT 0.6 3.7 0.4 3.0 0.3 5.0 1.8 1.2 – NJ 0.6 0.3 0.2 – DE 1.6 1.7 0.6 – MD 6.1 0.9 0.9 1.0 1.3 0.2 – DC 1.3 2.0 1.0 0.6 0.4 0.8 Railway Supply 0.6 1.6 1.7 Industry GVA 2.9 (U.S.$ Billions) 15.1 0.1–0.3 0.5 1.7 0.4–1.1 1.2–4.1 0.1 4.2–15.1

Source: Oxford Economics, IMPLAN

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 23 In 2017, the states where the railway supply industry generated the highest economic impact, in terms of GVA, include Texas ($15.1 billion), California $18.1 billion ($6.1 billion), Illinois ($5.0 billion), Pennsylvania ($3.7 billion), and New York ($3.1 billion). These five states account for nearly 45 percent of railway Contribution to GDP from suppliers’ economic impact nationwide. Fig. 15 presents a map that shows, railway supply activity in the in absolute dollar terms, how the railway supply industry’s economic impact Southwest region. differs by state. 2.0 LQ 5.2 LOCATION QUOTIENTS The Southwest region has double the concentration A location quotient (LQ) for an industry helps to illustrate how concentrated of railway supply impacts it is in one state by comparison to others. A location quotient that is equal to compared to the U.S. one indicates that the state’s industry concentration is equal to the national economy overall. concentration of the same industry. States with higher location quotients (usually greater than 1.2) indicate that a region has a higher concentration in the production of that good or service, relative to the rest of the nation.

A value of 1.5 indicates that industry output within the region is 1.5 times more concentrated than the U.S. average. A location quotient below one indicates that industry output within the region is less concentrated compared to the U.S. average.

Fig. 16. Top 10 states by GVA impacts and location quotients (LQ)

Top GVA States Top LQ States

GVA (in GVA (in Rank State billions) LQ Rank State billions) LQ

1 Texas $15.1 2.3 1 Louisiana $2.9 2.9

2 California $6.1 0.6 2 Oklahoma $2.0 2.6

3 Illinois $5.0 1.6 3 Alaska $0.5 2.4

4 Pennsylvania $3.7 1.3 4 Texas $15.1 2.3

5 New York $3.1 0.5 5 Wyoming $0.3 2.0

6 Ohio $3.0 1.2 6 Alabama $1.6 1.8

7 Louisiana $2.9 2.9 7 Oregon $1.4 1.6

8 Oklahoma $2.0 2.6 8 Illinois $5.0 1.6

9 Indiana $1.8 1.3 9 North Dakota $0.4 1.6

10 Florida $1.7 0.5 10 Montana $0.3 1.5

Source: Oxford Economics, IMPLAN

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 24 Note: States with high GVA do not necessarily result in high location quotients, as this statistic is relative to national output. For example, if the railway supply industry makes up 0.52 percent of Pennsylvania’s economy and only 0.41 percent of the U.S. economy, then Pennsylvania’s LQ for the railway supply industry would be 1.3 (0.52% / 0.41%).

As noted above, the GVA impacts of the railway supply industry are largest in states such as Texas, California, and Illinois. However, only Texas, from the top five states in terms of GVA, ranks in the top five LQ values, meaning the scale of the impact does not indicate a particular concentration. The states with high LQ values include Louisiana, Oklahoma, Alaska, and Wyoming. This indicates, for example, that the economy of Louisiana is more reliant on the railway supply industry compared to California, even though California has a higher output produced by the railway supply industry.

Fig. 17 presents a map that shows, in relative terms (LQ), how railway suppliers’ economic impact differs by state.

Fig. 17. Railway supply location quotient (LQ) by state

0.8 VT – 0.5 0.7 1.5 1.6 0.7 0.6 – NH 1.6 0.4 – MA 0.9 0.5 1.1 0.5 0.4 – RI 2.0 0.7 0.5 – CT 0.9 1.3 0.9 1.2 0.5 1.6 1.3 0.5 – NJ 1.0 1.1 0.7 – DE 1.2 0.8 0.4 – MD 0.6 1.4 0.8 1.2 0.6 1.0 2.6 1.2 0.5 0.4 1.5 LQ of Railway 1.3 1.8 0.8 Supply Industry 2.9 2.3 0.2–0.6 2.4 0.7–1.1 0.5 1.2–1.8 1.9–2.9 0.2

Source: Oxford Economics, IMPLAN

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 25 6. CONCLUSION

The railway supply industry is a vital and growing industry in the U.S. The industry’s ability to offer a variety of products and services is evidenced by the geographic distribution and economic contribution to all 50 states. In 2017, we estimate that the railway supply industry directly employed 125,100 workers across all 50 states and DC.

In total, the railway supply industry supports employment of nearly 650,000 workers in the U.S. and generates over $74.2 billion in economic activity. This economic activity is greatest in the Southwest states and will continue to grow and support employment and economic activity throughout the country.

The use of railroads is essential to virtually all supply chains in every industry, making them indispensable to the economy. Not only do railway suppliers produce vital pieces of equipment to support that economic activity; they also provide additional support services such as leasing operations; distribution and logistics; as well as maintenance and repair services that generate additional economic value throughout the economy.

Fig. 18. Summary of the railway supply industry’s economic impact

Direct Indirect Induced Total

Income, GVA, Federal, State and Local Taxes in billions of US $

Employment 125,100 252,800 272,200 650,000

Income 9.9 19.5 14.1 43.4

GVA 19.9 29.8 24.6 74.2

Federal, State and Local Taxes 16.9

Source: Oxford Economics, IMPLAN

Appendix B provides a detailed summary of the economic impact of the railway supply industry in each of the U.S. states.

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 26 APPENDIX A

CREATING THE DATABASE

To conduct the impact assessment and analysis, Oxford Economics constructed a state-level database using information gathered from various sources. Use of multiple data sources increases accuracy in the database and mitigates chances of error and outliers in the estimation process. The sources of data include:

1. BLS Quarterly Census of Employment and Wages (QCEW): 2017 annual data.

2. BLS Occupational Employment Statistics (OES): May 2017 data.

3. Census American Community Survey (ACS): 2016 annual data.

4. BEA Gross Domestic Product (GDP): 2017 GDP by metro area.

5. IMPLAN (IMpact analysis for PLANning): 2017 annual data.

6. Census County Business Patterns (CBP): 2016 annual data.

7. Proprietary databases: Including data provided by a member survey.

Oxford Economics would like to thank the members of RSI, RSSI, REMSA, and RTA for their support in completing detailed surveys that allowed us to complete this analysis. Without this input, the analysis would not have been possible.

ABOUT IMPLAN

This analysis utilized IMPLAN economic impact software. IMPLAN is an input- output modeling system used to build models at various levels of geography, including national, state, county, and congressional district. It allows for adjustable assumptions of supply-chain connections and leakages from survey input data and improved accuracy of assumptions. All data are presented in 2016 values.

IMPLAN is widely used and recognized by government organizations, non- profits, economic development organizations, workforce planners, education institutions, and consultants across the U.S. and Canada.

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 27 IMPACT MODEL STRUCTURE

The model is designed to capture the inter-industry relationships, consumer spending, and ripple effects that result from direct economic activity generated by railway suppliers. The impacts are measured across four channels:

• Direct Impact: direct employment and spending by the industry’s business operations

• Indirect Impact: supply-chain effects, stemming from industry’s operations (e.g. legal services, utilities, etc.)

• Induced Impact: describes impact resulting from employees spending their incomes in state/national economy

• Taxes: Gross tax receipts paid at the federal, state and local level.

Input-output modeling characterizes and follows the flow of spending through an economy, thereby capturing and quantifying effects on supply chains, consumer/payroll spending, economic leakages and even taxes paid to governments. The following figure depicts the overarching structure of the model.

INDUSTRY INDUSTRY INDUSTRY 1 2 3 Consumer Other Final Total Spending Demand Outputs INDUSTRY 1 C 1,1 C 2,1 C 3,1 C 4, 1 C 5,6,7,1 C 8,1 INDUSTRY 2 C 1,2

INDUSTRY 3 C 1,3

Employment C 1,4

Incomes

Profits C 1,5

Leakages C 1,6,7

Total Inputs C 1,8

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 28 APPENDIX B

This table displays the full impact results for railway suppliers in each state and the U.S.

Income, GVA, and State & Local Taxes in US$

United States LQ = 1.0 Direct Indirect Induced Total

Employment 125,104 252,768 272,152 650,024

Income 9,859,616,562 19,524,217,481 14,061,629,584 43,445,463,627

GVA 19,883,199,352 29,775,153,692 24,570,304,786 74,228,657,830

Taxes, all sources 16,931,648,274

Alabama LQ = 1.8 Direct Indirect Induced Total

Employment 4,202 7,333 5,476 17,069

Income 272,629,001 425,448,545 234,510,017 934,950,117

GVA 432,307,360 673,501,853 431,648,768 1,555,603,779

Taxes, all sources 343,565,508

Alaska LQ = 2.4 Direct Indirect Induced Total

Employment 121 666 801 1,567

Income 10,635,768 84,325,789 42,305,099 136,155,976

GVA 41,295,721 404,865,418 86,092,606 534,779,793

Taxes, all sources 394,309,175

Arizona LQ = 0.5 Direct Indirect Induced Total

Employment 1,603 2,407 2,753 6,775

Income 99,377,619 131,192,265 134,586,818 367,288,528

GVA 119,087,776 214,250,548 232,621,380 570,658,617

Taxes, all sources 132,224,598

Arkansas LQ = 1.5 Direct Indirect Induced Total

Employment 1,604 3,920 2,664 8,249

Income 87,031,278 215,841,889 110,946,828 417,190,036

GVA 189,306,340 357,931,201 210,192,179 766,264,244

Taxes, all sources 174,907,307

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 29 California LQ = 0.6 Direct Indirect Induced Total

Employment 10,259 15,745 20,412 46,176

Income 930,921,949 1,224,224,417 1,219,846,759 3,352,243,388

GVA 2,107,701,686 1,901,096,396 2,141,433,329 6,089,416,521

Taxes, all sources 1,459,316,542

Colorado LQ = 1.2 Direct Indirect Induced Total

Employment 2,316 5,202 7,104 14,477

Income 164,944,608 552,727,700 364,037,944 1,075,239,782

GVA 259,053,202 736,529,633 628,265,049 1,608,128,239

Taxes, all sources 445,369,991

Connecticut LQ = 0.5 Direct Indirect Induced Total

Employment 754 1,471 1,955 4,201

Income 72,527,756 131,569,557 137,586,900 343,936,459

GVA 79,676,047 200,962,642 232,594,167 518,590,464

Taxes, all sources 134,561,458

Delaware LQ = 0.7 Direct Indirect Induced Total

Employment 224 369 521 1,110

Income 22,201,228 30,002,765 31,258,531 82,740,911

GVA 57,715,799 61,491,457 66,137,037 184,112,460

Taxes, all sources 35,124,200

District of Columbia LQ = 0.3 Direct Indirect Induced Total

Employment 359 402 397 1,168

Income 41,286,994 49,650,516 40,425,406 132,873,452

GVA 50,318,680 62,301,834 51,329,817 165,929,409

Taxes, all sources 31,116,562

Florida LQ = 0.5 Direct Indirect Induced Total

Employment 5,465 7,393 7,940 20,823

Income 317,756,318 396,549,239 362,589,651 1,079,541,225

GVA 439,644,929 625,924,132 639,604,878 1,715,852,381

Taxes, all sources 419,241,837

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 30 Georgia LQ = 0.8 Direct Indirect Induced Total

Employment 4,056 6,692 6,975 17,715

Income 255,017,860 409,412,553 334,988,764 1,000,091,590

GVA 376,671,259 652,234,371 614,645,674 1,650,197,654

Taxes, all sources 368,408,101

Hawaii LQ = 0.2 Direct Indirect Induced Total

Employment 52 246 295 593

Income 3,438,612 12,732,305 13,857,020 30,073,876

GVA 4,033,856 23,487,443 26,768,820 54,427,251

Taxes, all sources 13,836,546

Idaho LQ = 1.1 Direct Indirect Induced Total

Employment 977 1,655 1,365 3,982

Income 56,329,939 81,120,065 55,436,390 190,811,952

GVA 87,082,782 118,529,599 93,195,066 298,463,061

Taxes, all sources 69,211,296

Illinois LQ = 1.6 Direct Indirect Induced Total

Employment 9,418 15,107 16,627 41,270

Income 811,470,957 1,112,357,754 897,005,564 2,832,486,367

GVA 1,685,965,202 1,702,887,083 1,582,559,757 5,018,322,999

Taxes, all sources 1,140,990,374

Indiana LQ = 1.3 Direct Indirect Induced Total

Employment 3,338 6,694 6,215 16,360

Income 243,763,945 413,723,641 283,470,547 948,792,522

GVA 544,196,816 685,541,220 531,175,019 1,778,509,999

Taxes, all sources 369,325,801

Iowa LQ = 0.9 Direct Indirect Induced Total

Employment 1,628 2,591 2,741 6,950

Income 134,657,615 155,608,641 127,192,385 414,602,946

GVA 169,611,374 242,570,497 232,339,392 644,612,544

Taxes, all sources 144,602,109

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 31 Kansas LQ = 1.4 Direct Indirect Induced Total

Employment 1,584 4,157 3,344 9,083

Income 146,401,184 235,455,816 147,386,183 524,795,876

GVA 286,841,382 311,668,862 260,690,084 852,939,493

Taxes, all sources 204,347,726

Kentucky LQ = 1.2 Direct Indirect Induced Total

Employment 3,510 4,683 3,850 12,050

Income 194,691,009 241,798,359 168,949,772 605,891,092

GVA 321,313,800 384,740,343 302,255,593 1,011,217,467

Taxes, all sources 225,373,617

Louisiana LQ = 2.9 Direct Indirect Induced Total

Employment 2,820 7,318 6,720 16,871

Income 266,143,663 537,590,077 295,745,308 1,095,153,677

GVA 1,538,462,361 891,349,723 553,985,766 2,941,928,381

Taxes, all sources 567,074,863

Maine LQ = 0.7 Direct Indirect Induced Total

Employment 572 1,205 897 2,675

Income 29,628,831 54,451,091 37,493,718 121,476,914

GVA 37,885,570 72,791,768 65,678,184 176,621,721

Taxes, all sources 44,674,553

Maryland LQ = 0.4 Direct Indirect Induced Total

Employment 1,910 2,111 2,483 6,497

Income 145,058,554 140,749,957 135,861,246 421,610,060

GVA 179,232,913 211,966,614 242,594,743 633,499,761

Taxes, all sources 154,844,537

Massachusetts LQ = 0.4 Direct Indirect Induced Total

Employment 1,545 2,160 3,161 6,864

Income 129,588,178 186,804,897 216,939,018 533,363,158

GVA 153,267,889 262,403,692 336,719,893 754,592,821

Taxes, all sources 182,394,534

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 32 Michigan LQ = 0.7 Direct Indirect Induced Total

Employment 2,941 6,048 6,187 15,266

Income 202,520,591 391,889,004 302,171,762 905,863,200

GVA 291,040,274 577,335,240 517,980,906 1,404,701,277

Taxes, all sources 329,173,767

Minnesota LQ = 0.7 Direct Indirect Induced Total

Employment 1,636 3,033 3,869 8,518

Income 139,282,556 214,958,385 213,198,834 565,036,066

GVA 351,984,642 333,617,737 365,297,789 1,042,345,379

Taxes, all sources 230,051,480

Mississippi LQ = 1.3 Direct Indirect Induced Total

Employment 1,375 3,209 2,222 6,838

Income 87,546,627 167,142,620 83,673,885 338,927,555

GVA 189,975,608 238,430,996 159,792,469 590,732,300

Taxes, all sources 144,328,166

Missouri LQ = 0.8 Direct Indirect Induced Total

Employment 2,324 4,364 4,307 11,034

Income 155,627,408 261,210,682 203,884,039 622,374,975

GVA 177,987,159 387,288,639 355,994,207 927,461,181

Taxes, all sources 208,020,278

Montana LQ = 1.5 Direct Indirect Induced Total

Employment 507 1,224 984 2,713

Income 34,906,140 63,914,472 38,529,198 136,528,214

GVA 124,860,674 104,345,038 66,858,318 292,804,592

Taxes, all sources 73,337,680

Nebraska LQ = 0.9 Direct Indirect Induced Total

Employment 932 1,637 1,732 4,298

Income 58,227,863 120,678,228 85,418,432 264,136,066

GVA 73,024,054 182,791,745 155,034,666 411,739,594

Taxes, all sources 90,463,060

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 33 Nevada LQ = 0.5 Direct Indirect Induced Total

Employment 720 1,322 1,202 3,273

Income 43,594,200 72,684,695 57,114,473 174,916,352

GVA 61,480,498 123,637,848 106,809,489 294,924,918

Taxes, all sources 70,698,265

New Hampshire LQ = 0.6 Direct Indirect Induced Total

Employment 374 840 794 2,026

Income 24,212,400 52,787,714 42,832,710 121,221,605

GVA 25,700,559 70,924,292 68,630,971 167,693,019

Taxes, all sources 40,054,739

New Jersey LQ = 0.5 Direct Indirect Induced Total

Employment 1,934 3,331 4,385 9,653

Income 175,318,669 285,274,433 283,999,395 744,194,375

GVA 311,027,930 406,756,410 475,937,459 1,190,661,012

Taxes, all sources 309,829,786

New Mexico LQ = 1.0 Direct Indirect Induced Total

Employment 399 1,537 1,223 3,155

Income 24,533,107 99,422,994 49,762,570 172,622,744

GVA 73,706,739 219,261,133 96,534,941 386,771,775

Taxes, all sources 129,791,396

New York LQ = 0.5 Direct Indirect Induced Total

Employment 5,097 8,308 11,175 24,608

Income 483,529,801 816,628,948 838,934,171 2,140,534,107

GVA 573,388,848 1,178,870,353 1,378,742,997 3,144,495,323

Taxes, all sources 806,608,077

North Carolina LQ = 0.6 Direct Indirect Induced Total

Employment 3,114 5,101 5,414 13,629

Income 209,211,010 297,745,980 255,347,377 763,103,690

GVA 345,442,109 489,771,466 478,824,362 1,316,179,251

Taxes, all sources 283,980,748

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 34 North Dakota LQ = 1.6 Direct Indirect Induced Total

Employment 254 1,042 902 2,193

Income 23,693,546 85,537,955 43,803,254 152,105,707

GVA 87,929,715 192,129,344 79,105,048 355,884,390

Taxes, all sources 135,873,250

Ohio LQ = 1.2 Direct Indirect Induced Total

Employment 4,616 10,219 9,886 24,896

Income 312,627,806 651,821,747 473,288,098 1,450,843,681

GVA 1,012,522,720 1,071,403,063 862,668,308 2,956,530,693

Taxes, all sources 604,179,585

Oklahoma LQ = 2.6 Direct Indirect Induced Total

Employment 1,188 8,514 8,635 18,232

Income 89,060,727 862,775,196 391,098,897 1,338,821,046

GVA 188,825,317 1,177,979,111 673,382,078 2,027,547,983

Taxes, all sources 597,863,150

Oregon LQ = 1.6 Direct Indirect Induced Total

Employment 3,532 7,010 5,894 16,484

Income 239,262,691 446,026,014 271,625,253 959,805,714

GVA 254,439,528 650,178,268 477,194,852 1,398,314,700

Taxes, all sources 348,214,255

Pennsylvania LQ = 1.3 Direct Indirect Induced Total

Employment 5,723 13,944 14,062 34,001

Income 477,122,191 1,104,961,443 763,588,492 2,367,738,331

GVA 715,403,572 1,629,540,586 1,267,900,635 3,657,390,486

Taxes, all sources 875,562,190

Rhode Island LQ = 0.4 Direct Indirect Induced Total

Employment 202 363 428 998

Income 13,279,904 25,538,361 23,830,140 63,177,116

GVA 16,997,168 36,395,619 40,155,504 94,329,631

Taxes, all sources 23,076,612

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 35 South Carolina LQ = 1.2 Direct Indirect Induced Total

Employment 2,679 4,803 3,940 11,508

Income 176,784,152 269,240,393 167,044,855 619,187,760

GVA 256,058,703 420,352,621 308,572,554 1,005,271,374

Taxes, all sources 236,835,060

South Dakota LQ = 0.5 Direct Indirect Induced Total

Employment 283 499 502 1,276

Income 14,960,842 24,763,715 23,662,792 62,652,195

GVA 18,664,108 42,194,708 43,488,340 103,691,704

Taxes, all sources 21,558,456

Tennessee LQ = 1.0 Direct Indirect Induced Total

Employment 2,738 5,092 5,860 13,680

Income 299,693,569 304,099,216 299,153,344 894,070,209

GVA 393,569,840 459,170,084 488,358,358 1,339,886,912

Taxes, all sources 283,258,973

Texas LQ = 2.3 Direct Indirect Induced Total

Employment 12,119 40,636 54,125 106,139

Income 1,266,176,023 4,683,639,296 2,786,471,954 8,691,918,615

GVA 3,679,455,321 6,807,056,321 4,796,475,140 15,148,298,565

Taxes, all sources 2,703,523,778

Utah LQ = 1.0 Direct Indirect Induced Total

Employment 1,146 1,918 2,108 5,184

Income 81,068,292 115,777,641 93,280,180 290,817,226

GVA 213,768,076 203,173,371 168,945,014 586,060,382

Taxes, all sources 127,912,490

Vermont LQ = 0.5 Direct Indirect Induced Total

Employment 199 426 292 919

Income 9,270,938 16,769,562 13,183,774 39,290,514

GVA 11,621,376 24,020,090 21,932,264 57,876,089

Taxes, all sources 14,837,771

THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 36 Virginia LQ = 0.8 Direct Indirect Induced Total

Employment 4,393 6,505 6,326 17,254

Income 320,986,619 472,182,403 325,474,534 1,126,541,636

GVA 411,881,817 677,881,738 572,019,488 1,676,687,480

Taxes, all sources 396,448,696

Washington LQ = 0.8 Direct Indirect Induced Total

Employment 3,039 4,314 4,259 11,579

Income 248,071,326 297,172,202 226,915,274 769,920,956

GVA 516,660,283 449,980,905 409,272,828 1,374,397,765

Taxes, all sources 318,757,648

West Virginia LQ = 1.1 Direct Indirect Induced Total

Employment 648 2,047 1,234 3,949

Income 33,863,097 99,819,244 52,795,732 187,183,828

GVA 59,631,529 175,776,068 98,274,338 334,548,270

Taxes, all sources 87,297,142

Wisconsin LQ = 0.9 Direct Indirect Induced Total

Employment 2,428 4,851 4,744 12,085

Income 157,947,604 302,969,026 226,623,471 693,386,624

GVA 221,196,037 458,056,692 405,787,690 1,098,925,231

Taxes, all sources 257,832,134

Wyoming LQ = 2.0 Direct Indirect Induced Total

Employment 249 1,102 761 2,111

Income 21,733,999 93,448,078 32,502,823 147,233,613

GVA 64,282,403 187,807,876 67,806,574 317,837,495

Taxes, all sources 127,458,406

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THE ECONOMIC IMPACT OF RAILWAY SUPPLIERS IN THE U.S. | 38 THE ECONOMIC IMPACT OF ALABAMA RAILWAY SUPPLIERS IN THE U.S.

The railway supply industry helps to power Alabama’s economy.

TOTAL IMPACT SUMMARY CONTRIBUTION TO ALABAMA’S GDP $1.6 billion GDP IN 2017 $344 Jobs 17,069 million Employee $935 million compensation $1.6 Tax contribution from the state Tax contribution $344 million of Alabama in 2017. This was made up of $235 million TOTAL RAILWAY SUPPLY billion in federal taxes and $108 million JOB IMPACT BY INDUSTRY in state and local taxes. IN ALABAMA

6K In 2017, the railway supply OCCUPATION PROFILE industry directly employed 5K OF RAILWAY SUPPLIERS IN ALABAMA 4K 4,202 workers in Alabama. 3K 4% 7% On average, they earned 5% 2K 5% $64,888 42% 1K in annual income. 6%

0 By comparison, the average worker in the 6% 18+12+100+54+3+27+55+21+26+15+3 U.S. earned approximately $55,400 7% 7% 11% Information Government Construction Manufacturing Other Services Financial Activities Production Leisure and Hospitality Leisure 7,333 42+Office and Administrative Support 11+76+6+54t Transportation and Material Moving

Natural Resources and Mining Natural Resources Construction and Extraction Education and Health Services indirect jobs Trade, Transportation, & Utilities Transportation, Trade, Management Professional & Business Services Professional supported through Architecture and Engineering railway suppliers’ Installation, Maintenance, and Repair Source: Oxford Economics, IMPLAN Business and Financial Operations supply-chain purchases. Sales and Related All other 5,534 Source: Oxford Economics, IMPLAN 3.1 jobs induced jobs Additional jobs supported elsewhere in Alabama’s economy were sustained as 3,210 for every direct job in the state’s employees spent their wages railway supply industry. on consumer goods. Miles of rail in Alabama THE ECONOMIC IMPACT OF ARKANSAS RAILWAY SUPPLIERS IN THE U.S.

The railway supply industry helps to power Arkansas’ economy.

TOTAL IMPACT SUMMARY CONTRIBUTION TO ARKANSAS’ GDP $766 million GDP IN 2017 $175 Jobs 8,249 million Employee compensation $417 million Tax contribution from the state Tax contribution $175 million $766 of Arkansas in 2017. This was made up of $116 million TOTAL RAILWAY SUPPLY million in federal taxes and $59 million in JOB IMPACT BY INDUSTRY state and local taxes. IN ARKANSAS

2.5K In 2017, the railway supply OCCUPATION PROFILE industry directly employed 2.0K OF RAILWAY SUPPLIERS 1,604 IN ARKANSAS 1.5K workers in Arkansas. 4% 7% 1.0K On average, they earned 5% 5% 37% 0.5K $54,265 in annual income. 6% 0 By comparison, the average worker in the 6% 53+19+100+64+3+26+55+28+27+15+2 U.S. earned approximately $55,400 7% 11% 12% Information Government Construction Manufacturing Other Services Financial Activities

Leisure and Hospitality Leisure Production 3,920 37+Construction and Extraction 12+1176+6+54t Office and Administrative Support Natural Resources and Mining Natural Resources Education and Health Services indirect jobs Transportation and Material Moving Management Trade, Transportation, and Utilities Transportation, Trade, Professional and Business Services Professional supported through Installation, Maintenance, and Repair railway suppliers’ Architecture and Engineering Source: Oxford Economics, IMPLAN Business and Financial Operations supply-chain purchases. Sales and Related All other 2,725 Source: Oxford Economics, IMPLAN 4.1 jobs induced jobs Additional jobs supported elsewhere in Arkansas’s economy were sustained as 2,417 for every direct job in the state’s employees spent their wages railway supply industry. on consumer goods. Miles of rail in Arkansas THE ECONOMIC IMPACT OF INDIANA RAILWAY SUPPLIERS IN THE U.S.

The railway supply industry helps to power Indiana’s economy.

TOTAL IMPACT SUMMARY CONTRIBUTION TO INDIANA’S GDP $1.8 billion GDP IN 2017 $369 Jobs 16,360 million Employee compensation $949 million Tax contribution from the state Tax contribution $369 billion $1.8 of Indiana in 2017. This was made up of $261 million TOTAL RAILWAY SUPPLY billion in federal taxes and $109 million JOB IMPACT BY INDUSTRY in state and local taxes. IN INDIANA

5K In 2017, the railway supply OCCUPATION PROFILE industry directly employed 4K OF RAILWAY SUPPLIERS 3,338 IN INDIANA 3K workers in Indiana. 8% 2K On average, they earned 5% 5% 34% 1K $73,028 6% in annual income. 6% 0 By comparison, the average worker in the U.S. earned approximately $55,400 6% 9+17+100+59+3+27+47+27+27+16+1 7% 12% 12% Information Government Construction Manufacturing Other Services Financial Activities

Leisure and Hospitality Leisure Production 6,694 34+Office and Administrative Support 12+6+6+58t Construction and Extraction Natural Resources and Mining Natural Resources Education and Health Services indirect jobs Transportation and Material Moving Management Trade, Transportation, and Utilities Transportation, Trade, Professional and Business Services Professional supported through Business and Financial Operations railway suppliers’ Installation, Maintenance, and Repair Source: Oxford Economics, IMPLAN Sales and Related supply-chain purchases. Architecture and Engineering All other 6,329 Source: Oxford Economics, IMPLAN 3.9 jobs induced jobs Additional jobs supported elsewhere in Indiana’s economy for were sustained as 4,274 every direct job in the state’s employees spent their wages railway supply industry. on consumer goods. Miles of rail in Indiana THE ECONOMIC IMPACT OF KENTUCKY RAILWAY SUPPLIERS IN THE U.S.

The railway supply industry helps to power Kentucky’s economy.

TOTAL IMPACT SUMMARY CONTRIBUTION TO KENTUCKY’S GDP IN 2017 GDP $1.0 billion $225 Jobs 12,050 million Employee $1.0 billion compensation $606 million Tax contribution from the state Tax contribution $225 million of Kentucky in 2017. This was made up of $150 million TOTAL RAILWAY SUPPLY in federal taxes and $76 million in JOB IMPACT BY INDUSTRY state and local taxes. IN KENTUCKY

3K In 2017, the railway supply OCCUPATION PROFILE industry directly employed OF RAILWAY SUPPLIERS IN KENTUCKY 2K 3,510 workers in Kentucky. 10% On average, they earned 4% 1K 4% 25% $55,471 6% in annual income. 6% 0 By comparison, the average worker in the 6% U.S. earned approximately $55,400 21% 31+45+100+69+5+32+78+29+32+16+3 6% 12% Information Government Construction Manufacturing Other Services Financial Activities

Leisure and Hospitality Leisure Production 4,683 25+Construction and Extraction 21+126+6+410t Office and Administrative Support Natural Resources and Mining Natural Resources Education and Health Services indirect jobs Management Transportation and Material Moving Trade, Transportation, and Utilities Transportation, Trade, Professional and Business Services Professional supported through Installation, Maintenance, and Repair railway suppliers’ Business and Financial Operations Source: Oxford Economics, IMPLAN Architecture and Engineering supply-chain purchases. Sales and Related All other 3,857 Source: Oxford Economics, IMPLAN 2.4 jobs induced jobs Additional jobs supported elsewhere in Kentucky’s economy were sustained as 2,608 for every direct job in the state’s employees spent their wages railway supply industry. on consumer goods. Miles of rail in Kentucky THE ECONOMIC IMPACT OF MISSOURI RAILWAY SUPPLIERS IN THE U.S.

The railway supply industry helps to power Missouri’s economy.

TOTAL IMPACT SUMMARY CONTRIBUTION TO MISSOURI’S GDP $927 million GDP IN 2017 $208 Jobs 11,034 million Employee compensation $622 million Tax contribution from the state Tax contribution $208 million $927 of Missouri in 2017. This was made up of $146 million TOTAL RAILWAY SUPPLY million in federal taxes and $62 million in JOB IMPACT BY INDUSTRY state and local taxes. IN MISSOURI

2,500 In 2017, the railway supply OCCUPATION PROFILE industry directly employed 2,000 OF RAILWAY SUPPLIERS 2,324 IN MISSOURI 1,500 workers in Missouri. 10% 1,000 On average, they earned 4% 23% 6% 500 $66,971 in annual income. 6% 0 By comparison, the average worker in the 7% 16% U.S. earned approximately $55,400 7% 26+31+100+85+8+56+88+40+41+21+2 7% 15% Information Government Construction Manufacturing Other Services Financial Activities

Leisure and Hospitality Leisure Production 4,364 23+Construction and Extraction 16+157+6+6410t Office and Administrative Support Natural Resources and Mining Natural Resources Education and Health Services indirect jobs Sales and Related Business and Financial Operations Trade, Transportation, and Utilities Transportation, Trade, Professional and Business Services Professional supported through Transportation and Material Moving railway suppliers’ Management Source: Oxford Economics, IMPLAN Installation, Maintenance, and Repair supply-chain purchases. Architecture and Engineering All other 4,347 Source: Oxford Economics, IMPLAN 3.7 jobs induced jobs Additional jobs supported elsewhere in Missouri’s economy were sustained as 3,858 for every direct job in the state’s employees spent their wages railway supply industry. on consumer goods. Miles of rail in Missouri THE ECONOMIC IMPACT OF SOUTH CAROLINA RAILWAY SUPPLIERS IN THE U.S.

The railway supply industry helps to power South Carolina’s economy.

TOTAL IMPACT SUMMARY CONTRIBUTION TO SOUTH CAROLINA’S GDP $1.0 billion GDP IN 2017 $237 Jobs 11,508 million Employee compensation $619 million Tax contribution from the state Tax contribution $237 million $ 1.0 of South Carolina in 2017. This was made up of $156 million TOTAL RAILWAY SUPPLY billion in federal taxes and $81 million in JOB IMPACT BY INDUSTRY state and local taxes. IN SOUTH CAROLINA

3K In 2017, the railway supply OCCUPATION PROFILE industry directly employed OF RAILWAY SUPPLIERS IN SOUTH CAROLINA 2K 2,679 workers in South Carolina. 8% On average, they earned 4% 1K 5% 29% $65,989 6% in annual income. 6% 0 By comparison, the average worker in the 7% U.S. earned approximately $55,400 16% 14+19+100+61+5+50+69+23+35+18+2 8% 11% Information Government Construction Manufacturing Other Services Financial Activities

Leisure and Hospitality Leisure Production 4,803 29+Office and Administrative Support 16+1187+6+654t Construction and Extraction Natural Resources and Mining Natural Resources Education and Health Services indirect jobs Business and Financial Operations Management Trade, Transportation, and Utilities Transportation, Trade, Professional and Business Services Professional supported through Sales and Related railway suppliers’ Transportation and Material Moving Source: Oxford Economics, IMPLAN Installation, Maintenance, and Repair supply-chain purchases. Architecture and Engineering All other 4,026 Source: Oxford Economics, IMPLAN 3.3 jobs induced jobs Additional jobs supported elsewhere in South Carolina’s were sustained as 2,277 economy for every direct job in the employees spent their wages state’s railway supply industry. on consumer goods. Miles of rail in South Carolina THE ECONOMIC IMPACT OF TENNESSEE RAILWAY SUPPLIERS IN THE U.S.

The railway supply industry helps to power Tennessee’s economy.

TOTAL IMPACT SUMMARY CONTRIBUTION TO TENNESSEE’S GDP IN 2017 GDP $1.3 billion $283 Jobs 13,680 million Employee compensation $894 million Tax contribution from the state Tax contribution $283 million of Tennessee in 2017. This was made up of $204 million TOTAL RAILWAY SUPPLY $1.3 billion in federal taxes and $80 million in JOB IMPACT BY INDUSTRY state and local taxes. IN TENNESSEE

3K In 2017, the railway supply OCCUPATION PROFILE industry directly employed OF RAILWAY SUPPLIERS IN TENNESSEE 2K 2,738 workers in Tennessee. 8% On average, they earned 4% 1K 6% 28% $109,476 6% in annual income. 6% 0 By comparison, the average worker in the 6% U.S. earned approximately $55,400 15% 20+27+100+80+6+49+76+38+40+22+4 7% 14% Information Government Construction Manufacturing Other Services Financial Activities

Leisure and Hospitality Leisure Production 5,092 28+Construction and Extraction 15+1476+6+48t Office and Administrative Support Natural Resources and Mining Natural Resources Education and Health Services indirect jobs Business and Financial Operations Management Trade, Transportation, and Utilities Transportation, Trade, Professional and Business Services Professional supported through Transportation and Material Moving railway suppliers’ Sales and Related Source: Oxford Economics, IMPLAN Installation, Maintenance, and Repair supply-chain purchases. Architecture and Engineering All other 5,850 Source: Oxford Economics, IMPLAN 4.0 jobs induced jobs Additional jobs supported elsewhere in Tennessee’s economy were sustained as 2,598 for every direct job in the state’s employees spent their wages railway supply industry. on consumer goods. Miles of rail in Tennessee www.pwc.com/us/nes

The Section 45G Tax Credit and the Economic Contribution of the Short Line Railroad Industry

July 2018

Prepared for:

American Short Line and Regional Railroad Association

The Section 45G Tax Credit and the Economic Contribution of the Short Line Railroad Industry

Table of Contents

Executive Summary E-1 I. Overview of the Industry 1 II. Economic Contributions of the Short Line Industry 5 III. Section 45G Tax Credit 9 Appendix: Methodology 15

This document has been prepared pursuant to an engagement between PricewaterhouseCoopers LLP and its Client. As to all other parties, it is for general information purposes only, and should not be used as a substitution for consultation with professional advisors.

The Section 45G Tax Credit and the Economic Contribution of the Short Line Railroad Industry

The Section 45G Tax Credit and the Economic Contribution of the Short Line Railroad Industry Executive Summary

Industry Overview

The US short line and regional railroad industry (“short line industry”) consists of the nation’s smallest freight railroads by revenue, defined according to the US Surface Transportation Board as Class II or III railroads with freight revenue of less than $475.75 million in 2016. There are an estimated 603 short line railroads as of 2016. The average short line railroad employs fewer than 30 people and operates less than 79 route miles. Combined, short lines operate 47,500 route miles, or 29 percent of the nation’s rail network, extending the reach of the rail network to rural communities, farmers, manufacturers, and other industries.1 Short lines together with the seven Class I railroads (those with freight revenue of at least $475.75 million) constitute the US freight railroad industry.

Economic Contribution of the Industry

PwC estimates the short line industry directly provided 17,100 jobs in the United States in 2016, paying labor income of $1.1 billion, and adding $2.2 billion to the nation’s GDP (see Table E-1). The short line industry’s economic impact goes beyond its own employees and direct payroll and value added. Including the indirect effects resulting from suppliers to the industry and induced effects resulting from expenditures of labor income, the industry supported 61,070 jobs in 2016. Operational spending by the industry supported 33,730 indirect and induced jobs in 2016, while capital spending by the industry of $755 million supported 10,240 jobs. This indicates that each job in the short line industry supports an average of 2.6 additional indirect and induced jobs across the rest of the US economy (combined jobs to direct jobs multiplier of 3.6). Combined labor income amounted to $3.8 billion (labor income multiplier of 3.3) and value added amounted to $6.5 billion (value added multiplier of 2.9).

Table E-1. Direct, Indirect, and Induced Economic Impacts of the US Short Line Industry, 2016 Indirect and Induced Impacts Direct Capital Combined Item Operational Impacts Investment Impacts Impacts Impacts Employment* 17,100 33,730 10,240 61,070 Labor Income ($ millions)** $1,129 $2,035 $616 $3,780 Value Added ($ millions) $2,228 $3,373 $948 $6,549 Source: PwC calculations using the IMPLAN modeling system (2016 database). Note: Details may not add to totals due to rounding. * Employment is defined as the number of payroll and self-employed jobs, including part-time jobs. ** Labor income is defined as wages and salaries and benefits as well as proprietors’ income.

1 American Short Line and Regional Railroad Association (ASLRRA), “Short Line and Regional Railroad Facts and Figures,” 2017; Association of American Railroads (AAR) to ASLRRA, February 17, 2017, 2015 Short Line Railroad Industry Estimates.

E-1

The Section 45G Tax Credit and the Economic Contribution of the Short Line Railroad Industry

In addition to the direct, indirect, and induced economic impacts, the short line industry impacts the US economy to the degree that other industries rely on the short line industry for transportation services. The three customer sectors most reliant on the short line industry are (1) mining, (2) manufacturing, and (3) agriculture. In total across the US economy, 0.51 percent of business inputs rely on transportation services provided by the short line industry, amounting to 478,820 jobs, $26.1 billion in labor income, and $56.2 billion in value added.

The Section 45G Tax Credit

Since its enactment in 2004, the railroad track maintenance tax credit (Internal Revenue Code section 45G) has provided an important financial incentive to maintain and improve short line infrastructure. The result has been a marked increase in industry investment, as evidenced, for example, by industry purchases of railway ties, which have grown at an annual rate of 6.3 percent since enactment of the credit, compared to 0.1 percent before the credit (see Figure E- 1). In addition, safety on short line railroads has improved since enactment of the credit. For example, train derailments on short line railroads have declined by 50 percent, from a rate of 4.72 per million train miles in 2004 to 2.37 in 2017 (see Figure E-2).

Figure E-1. Railway Tie Purchases have Increased since Enactment of Section 45G 7% 6.3% 6% 5% 4% Short 3% Line Railroads 2% 1.4%

1% 0.2% 0.1% Class I Railway Tie Purchases Tie Railway Annual Growth Rate of Rate Growth Annual 0% Railroads Before Section 45G (1988-2004) After Section 45G (2004-2016) Source: Railway Tie Association.

Figure E-2. Safety on Short Lines has Improved since Enactment of Section 45G 6.0 First year of sec. 45G credit (2005) 4.72 5.0

4.0 Short Line Railroads

Miles 3.0

- 2.37 3.23 2.0 Train Class I Railroads 1.0 1.73

0.0 Train Derailments Per Million Million Per Derailments Train

Source: Federal Railroad Administration. Note: Class I data exclude Amtrak.

E-2

The Section 45G Tax Credit and the Economic Contribution of the Short Line Railroad Industry

Standard cost of capital analysis indicates the section 45G credit provides strong incentives to invest in short line infrastructure.2 For instance, for a corporate taxpayer making a break-even, or marginal, investment in short line track maintenance that is below the section 45G per mile cap, relative to current law in which the section 45G credit is expired, extending the section 45G credit reduces the user cost of capital by 63 percent. Empirical estimates of the responsiveness of investment to changes in the user cost of capital indicate that such a reduction in the user cost of capital is associated with a 47.3 percent increase in investment (see Table E-2).3

The same type of analysis indicates that for short line infrastructure investors the section 45G credit is a much more powerful incentive at the margin than the two main investment incentives provided in the Tax Cuts and Jobs Act (TCJA), i.e., the lower corporate tax rate and full expensing for equipment. Relative to 2017 law, the combination of the TCJA’s two main incentives reduces the user cost of capital by 1.2 percent, which is associated with a 0.9 percent increase in investment.4

Table E-2. Impact of Section 45G Tax Credit and the Tax Cuts and Jobs Act (TCJA) on Cost of Capital and Investment for a Short Line Infrastructure Project Change in Cost Change in Tax Change of Capital Investment Section 45G Tax Credit -63.0% 47.3% TCJA (reduced corporate tax rate and expensing) -1.2% 0.9%

2 The user cost of capital is the real before-tax rate of return that a marginal (i.e., break-even) investment must earn to recover the cost of investment, pay taxes on business income, and pay an expected after-tax rate of return to investors that covers their opportunity cost. 3 Kevin A. Hassett and R. Glenn Hubbard, “Tax Policy and Business Investment,” in Handbook of Public Economics, Vol. 3, edited by Alan J. Auerbach and Martin Feldstein, pp. 1293–1343, 2002. 4 Expensing under TCJA has relatively little effect on short line investment incentives because short line investors previously were permitted to expense 75 percent of track maintenance expenditures under a safe harbor provided by IRS Revenue Procedure 2002-65.

E-3

The Section 45G Tax Credit and the Economic Contribution of the Short Line Railroad Industry

I. Overview of the Industry

Number of Railroads, Revenue, and Employment

Short lines together with the seven Class I railroads (those with freight revenue of at least $475.75 million) constitute the US freight railroad industry. While short line railroads far outnumber Class I railroads, the vast majority of total railroad industry revenue is earned by Class 1 railroads (see Figure 1). Based on annual surveys by the Association of American Railroads (AAR), we estimate that total revenue earned by the short line industry was $3.76 billion in 2016 – an average of $6.24 million per railroad.6 We estimate that total employment in the short line industry was 17,100 in 2016 – an average of 28 employees per railroad.7

5 American Short Line and Regional Railroad Association (ASLRRA), “Short Line and Regional Railroad Facts and Figures,” 2017; Association of American Railroads (AAR) to ASLRRA, February 17, 2017, 2015 Short Line Railroad Industry Estimates. 6 Association of American Railroads, “Railroad Facts 2017 Edition,” 2017. We used the AAR’s last published estimate of revenue earned by the short line industry in 2012 and projected it forward using the AAR’s estimated percent change in revenue for the Class I railroad industry. The revenues of Class I and short line railroads are highly correlated since they carry similar types of commodities. Short line industry revenues dropped approximately 8 percent in both 2015 and 2016, based on the revenue declines reported by Class I railroads, which are primarily attributable to declines in coal shipments. To the extent coal shipments on short line railroads have rebounded since 2016, short line industry revenue may have rebounded as well. 7 Association of American Railroads, “Railroad Facts 2017 Edition,” 2017. We used the AAR’s last published estimate of employment in the short line industry in 2012 and projected it forward using the AAR’s estimated percent change in employment for the overall railroad industry. This reflects an estimated drop in short line employment of approximately 9 percent in 2016, based on estimated employment declines for the entire railroad industry, which are primarily attributable to declines in coal shipments. Industry employment may have rebounded since 2016 to the extent coal shipments have rebounded.

The Section 45G Tax Credit and the Economic Contribution of the Short Line Railroad Industry

Figure 1. Comparison of Short Line and Class I Railroads Number of Railroads Revenue ($ billions) 800 $100 603 $80.67 600 $80 $60 400 $40 200 $20 7 $3.76 0 $0 Class I Short Line Class I Short Line

Source: ASLRRA, AAR, and PwC calculations using the IMPLAN modeling system (2016 database).

Rail Network and Relationship to Class I’s

Short lines operate a total of 47,500 route miles, or 29 percent of the nation’s rail network, extending the reach of the rail network to rural communities, farmers, manufacturers, and other industries (see Figure 2). In five states (Alaska, Maine, New Hampshire, Rhode Island, and Vermont), short lines provide the only freight rail service.8

Figure 2. Short Line and Regional Railroads of the United States

The vast majority of traffic on short lines (81 percent) either originates or terminates on short lines as part of a longer journey on Class I railroads or other modes of traffic (see Figure 3). A smaller share of traffic (10 percent) is transferred (bridged) from one Class I railroad to another

8 Ibid. AAR estimates that total miles of track owned by short line railroads exceeds 47,500, including multiple main tracks, passing tracks, sidings, crossovers, turn-outs and switching tracks.

The Section 45G Tax Credit and the Economic Contribution of the Short Line Railroad Industry

via short line, and the remainder (9 percent) is local traffic that is moved entirely by short line railroads. The average length of haul for short line railroads is 37.5 miles.9

Figure 3. Carloads Moved on Short Line Railroads by Traffic Type, 2015

Bridged, 10% Local, 9%

Originated, 33%

Terminated, 48%

Source: 2016 ASLRRA Data Survey.

Short line railroads provide service under many types of agreements (see Figure 4). The majority (51 percent) of short line track miles are wholly-owned by short line railroads, while the remainder are either leased from Class I railroads and other entities (31 percent), owned by the government (7 percent), or made available via trackage rights or other interchange agreements (12 percent).

Figure 4. Short Line Railroad Miles Operated by Type of Agreement, 2015 Government owned, 7% Other, 1%

Trackage rights, 11%

Self-owned, 51%

Leased, 30%

Source: 2016 ASLRRA Data Survey.

Commodities

Short line railroads move many types of commodities, and are typically more efficient than trucks for moving extremely heavy or bulky goods. Coal has historically been a major commodity shipped by rail, but as US coal production has declined precipitously in recent years so have shipments by rail, forcing short line railroads to diversify more into other

9 ASLRRA, “Short Line and Regional Railroad Facts and Figures,” 2017.

The Section 45G Tax Credit and the Economic Contribution of the Short Line Railroad Industry

commodities.10 As of 2015, grain and food products comprise the largest share of identified carloads moved by short lines (19 percent), followed by coal (17 percent), chemicals (16 percent), aggregates (11 percent), and lumber, paper and wood products (11 percent).11 Class I railroads have a broadly similar distribution of carloads by commodity as compared to short line railroads, but with a heavier concentration in coal.12

Figure 5. Short Line Carloads by Commodity (where identified), 2015

Petroleum Products, 3% Other, 6% Grain/Food Products, 19% Motor Vehicles, 8%

Metals/Metal Products, 8%

Coal, 17% Lumber/Paper/Wood Products, 11%

Aggregates, 11% Chemicals, 16%

Source: 2016 ASLRRA Data Survey. Note: The unidentified category (not shown) consists of trailers/containers with miscellaneous goods.

10 US coal production dropped 38 percent from 2008 to 2016, but is estimated to have increased 6 percent in 2017, according to the U.S. Energy Information Administration, available at https://www.eia.gov/todayinenergy/detail.php?id=34992#; ASLRRA, “Short Line and Regional Railroad Facts and Figures,” 2017. 11 Unidentified commodities consist of trailers/containers with miscellaneous goods. 12 AAR, “Railroad Ten-Year Trends, 2006-2015,” 2017.

The Section 45G Tax Credit and the Economic Contribution of the Short Line Railroad Industry

II. Economic Contributions

Direct, Indirect, and Induced Impacts

The economic activity of the short line industry can be measured using three separate metrics: employment, labor income, and value added, as defined below.

 Employment: The number of payroll and self-employed jobs (including part-time jobs), averaged over the year.  Labor income: The wages, salaries and benefits paid to employees and proprietors’ income for the self-employed.  Value added: The total output of each sector less the associated value of intermediate inputs. The sum of the value added across all sectors in the economy is GDP.13 An industry’s value added represents its contribution to GDP.

The short line industry’s economic impact goes beyond its own employees and direct payroll and value added. The industry uses goods and services supplied by other industries to produce its own services, generating upstream employment, payroll, and value added. The employees of the short line industry and its supply chain spend their wages and salaries on goods and services generating additional (induced) economic activity. The combined economic impact of the short line industry includes direct, supply chain (indirect), and induced impacts:

 Direct effects include activities directly attributable to short line companies, such as the employees and value added of short line companies.  Indirect effects include activities of the upstream supply chain to short line companies, including contractors and other companies providing inputs to short line companies and their immediate suppliers.  Induced effects reflect spending by employees of short line companies and their suppliers. Employees throughout the short line industry’s supply chain receive incomes associated with the direct and indirect activities, a portion of which will be consumed. This consumption causes additional economic activity attributable to the short line industry.

To quantify these linkages, we rely on the IMPLAN model, an input-output (I-O) model based on federal government data (see Appendix). The indirect and induced effects are determined separately for purchases of operating inputs (operational impact) and plant and equipment (investment impact).

As presented in Table 1, below, we estimate the short line industry directly provided 17,100 jobs in the United States in 2016, paying labor income of $1.1 billion, and adding $2.2 billion to the nation’s GDP.

Combined, including the indirect and induced effects, the industry supported 61,070 jobs in 2016. Operational spending by the industry supported 33,730 indirect and induced jobs in 2016, while capital spending by the industry of $755 million supported 10,240 jobs. This indicates that each job in the short line industry supports an average of 2.6 additional indirect

13 Value added differs from gross output (or sales) because it excludes the value of intermediate goods that are embedded in the final sales of each industry. The value of intermediate inputs could be counted multiple times if output of one segment of the short line industry serves as an input for another segment.

The Section 45G Tax Credit and the Economic Contribution of the Short Line Railroad Industry

and induced jobs across the rest of the US economy (combined jobs to direct jobs multiplier of 3.6).

Combined labor income amounted to $3.8 billion and value added to $6.5 billion. Labor income and value added multipliers for the industry are 3.3 and 2.9, respectively.

Table 1. Direct, Indirect, and Induced Economic Impacts of the US Short Line Industry, 2016 Indirect and Induced Impacts Direct Combined Item Capital Impacts Operational Impacts Investment Impacts Impacts Employment* 17,100 33,730 10,240 61,070 Labor Income ($ millions)** $1,129 $2,035 $616 $3,780 Value Added ($ millions) $2,228 $3,373 $948 $6,549 Source: PwC calculations using the IMPLAN modeling system (2016 database). Note: Details may not add to totals due to rounding. * Employment is defined as the number of payroll and self-employed jobs, including part-time jobs. ** Labor income is defined as wages and salaries and benefits as well as proprietors’ income.

Customer Impacts

In addition to the direct, indirect, and induced economic impacts, the short line industry impacts the US economy to the degree that other industries rely on the short line industry for transportation services. To quantify the degree of customer reliance on the short line industry, we estimate two alternative measures – inbound reliance and outbound reliance – representing two perspectives on the goods that are transported by short line railroads. Inbound reliance refers to the degree to which sectors rely on the short line industry for transportation of business inputs. Outbound reliance refers to the degree to which certain commodities are transported by short line railroads. More specifically:

 Inbound reliance includes the portion of a sector’s economic activity reliant on the short line industry as measured by the sector’s expenditures on short line rail transportation as a share of the sector’s expenditures on all transportation.  Outbound reliance includes the portion of US-produced commodities transported by short line railroads (measured by a combination of volume and value) as a share of all modes of transportation.

We use the IMPLAN model to estimate inbound customer reliance for all sectors (see Appendix). As shown in Table 2, the three sectors with the greatest inbound reliance on the short line industry are (1) mining, (2) manufacturing (including iron and steel manufacturing), and (3) agriculture.

In the mining sector, 1.63 percent of business inputs rely on transportation services provided by the short industry, amounting to 9,500 jobs, $895 million in labor income, and $2.2 billion in value added. In manufacturing, 1.11 percent of business inputs rely on transportation services provided by the short line industry, amounting to 106,650 jobs, $8.2 billion in labor income, and $16.9 billion in value added. In agriculture, 0.85 percent of business inputs rely on

The Section 45G Tax Credit and the Economic Contribution of the Short Line Railroad Industry

transportation services provided by the short line industry, amounting to 26,760 jobs, $1.2 billion in labor income, and $1.6 billion in value added. In total across the US economy, 0.51 percent of business inputs rely on transportation services provided by the short line industry, amounting to 478,820 jobs, $26.1 billion in labor income, and $56.2 billion in value added.

Table 2. Inbound Customer Reliance on the US Short Line Industry, 2016 Short Line Reliant Reliant Share of Reliant Labor Value Trans- Employ- Income Added Sector portation ment* ($millions)** ($millions) Cost Agriculture 0.85% 26,760 $1,192 $1,638

Mining 1.63% 9,500 $895 $2,249 Utilities 0.60% 3,400 $479 $1,581 Construction 0.40% 41,890 $2,330 $3,179 Manufacturing 1.11% 106,650 $8,238 $16,874 Wholesale and retail trade 0.02% 5,710 $270 $466 Transportation and warehousing 0.20% 11,950 $768 $1,050 Information 0.09% 5,410 $529 $1,607 Finance, insurance, real estate, 0.20% 64,980 $2,276 $16,866 rental and leasing Services 0.17% 195,090 $8,403 $9,932 Other 0.07% 7,470 $682 $736 Total 0.51% 478,820 $26,062 $56,177 Source: PwC calculations using the IMPLAN modeling system (2016 database). Note: Details may not add to totals due to rounding. * Employment is defined as the number of payroll and self-employed jobs, including part time jobs. ** Labor income is defined as wages and salaries and benefits as well as proprietors' income.

To estimate the outbound customer reliance on the short line industry, we use data published by the US Bureau of Transportation Statistics and US Census Bureau for 2012 and the AAR for 2016 indicating the share (by volume and value) of US-produced commodities that are shipped by rail. To determine the short line industry share, we then allocate the rail industry share between the short line industry and Class I railroads by revenue.14

Table 3 and Table 4 show the results of this analysis for select commodities. As shown in Table 3, products reliant on rail transportation include: (1) coal, with 67.5 percent of the volume of all US-produced coal shipped by rail in 2016; (2) chemicals, with 26.2 percent of the volume of all US-produced chemicals shipped by rail in 2012; and (3) grain, with 22.9 percent of the volume of all US-produced grain shipped by rail in 2016. Across all US-produced commodities, in 2012, 5.1 percent of the value and 16.8 percent of the volume was shipped by rail.15

14 While the revenue (and train miles) associated with rail transportation of many commodities may be largely attributable to Class I railroads, short line railroads often provide the first or last mile of service, or a bridge between Class I railroads (see Figure 3). In this sense, commodities shipped by rail are more dependent on short lines than indicated by the short line revenue share. 15 The most recent Economic Census data published by the US Census Bureau is for 2012.

The Section 45G Tax Credit and the Economic Contribution of the Short Line Railroad Industry

Table 3. Outbound Customer Reliance on the US Railroad Industry Volume of Shipments (thousands Value of of tons, Commodity Shipments Share of US unless Share of US Shipped by by Rail ($ production otherwise production Rail Year millions) by value noted) by volume All commodities 2012 705,879 5.1% 1,897,921 16.8% Coal 2012 29,028 63.2% 748,788 71.5% Coal 2016 N/A N/A 492,000 67.5% Chemicals 2012 60,758 19.2% 90,087 26.2% Grain 2016 N/A N/A 5,300 22.9% Source for 2012: US Bureau of Transportation Statistics and US Census Bureau, 2012 Economic Census, "Transportation - Commodity Flow Survey". Source for 2016: AAR, "Railroad 10-Year Trends 2006-2015," June 2017. Note: 2012 data includes a small portion that is transported by a combination of rail and other modes. Grain volume is in millions of bushels.

Based on the short line industry’s share of freight rail revenue, 4.9 percent of all freight rail transportation costs were incurred on short-line rail transportation. Multiplying rail volume of each commodity by the short line industry’s share of rail transportation costs provides an indication of the degree to which the short line industry is relied upon for transportation of these commodities: 3.3 percent of the volume of all US-produced coal in 2016, 1.3 percent of the volume of all US-produced chemicals in 2012, and 1.1 percent of the volume of all US-produced grain in 2016 (see Table 4).

Table 4. Outbound Customer Reliance on the US Short Line Industry Volume of Shipments Value of (thousands Commodity Shipments of tons, Share of Shipped by by Short Line Share of US unless US Short Line Rail ($ production otherwise production Rail Year millions) by value noted) by volume All commodities 2012 34,306 0.2% 92,239 0.8% Coal 2012 1,411 3.1% 36,391 3.5% Coal 2016 N/A N/A 23,911 3.3% Chemicals 2012 2,953 0.9% 4,378 1.3% Grain 2016 N/A N/A 258 1.1% Source for 2012: US Bureau of Transportation Statistics and US Census Bureau, 2012 Economic Census, "Transportation - Commodity Flow Survey"; PwC calculations. Source for 2016: AAR, "Railroad 10-Year Trends 2006-2015," June 2017; PwC calculations. Note: 2012 data includes a small portion that is transported by a combination of rail and other modes. Grain volume is in millions of bushels.

The Section 45G Tax Credit and the Economic Contribution of the Short Line Railroad Industry

III. Section 45G Tax Credit

Since its enactment in 2004, the railroad track maintenance tax credit (IRC section 45G) has been an important factor for the industry, providing incentives to taxpayers to maintain and improve short line infrastructure.

Legislative History and Policy Rationale

The section 45G credit was initially introduced in October 2003 as a permanent tax credit by Sen. Gordon Smith (R-OR) in the Local Railroad Rehabilitation and Investment Act of 2003 (S. 1703). The bill was co-sponsored by Sen. Ron Wyden (D-OR) and 17 other Senators,16 before being incorporated in a modified form in the Jumpstart Our Business Strength (JOBS) Act (S. 1637), passed by the Senate on May, 11, 2004. Following a House/Senate Conference, the legislation was included in the American Jobs Creation Act of 2004 (Public Law 108–357, enacted October 22, 2004), and effective for three years – taxable years beginning after December 31, 2004 and before January 1, 2008.

The provision has been extended six times, most recently by the Bipartisan Budget Act of 2018, which extended it retroactively through 2017. As indicated in Table 5, after the section 45G credit’s initial enactment period of three years, the credit has been extended 10 additional years. Of those 10 years of extensions, approximately 5-1/2 years have represented periods the credit was extended retroactively; only 4-1/2 years represent periods the credit was extended prospectively. As a result, taxpayers have not always been able to count on the availability of the section 45G credit when making investment plans.

The original rationale for the provision upon introduction of S. 1703 by Sen. Smith and co- sponsors was threefold.17 First, the bill’s sponsors noted the critical role played by short lines in the nation’s infrastructure, particularly in connecting farmers and small businesses in rural America to the larger rail network and providing an alternative to increasing truck traffic on local roads. Second, the bill’s sponsors believed there was a need to create incentives for taxpayers to maintain short lines, many of which had been abandoned or poorly maintained as branch lines of Class I’s before being spun-off to short line companies. Third, the bill’s sponsors recognized the need for short lines to upgrade to accommodate the new Class I industry standard maximum car weight of 286,000 lbs. (up from 263,000 lbs.), which was estimated to require $7 billion in new investment. A number of studies at the time documented the large infrastructure needs of small railroads.18

16 Co-sponsors of S. 1703 were Sen. Ron Wyden (D-OR), Sen. Sam Brownback (R-KS), Sen. Arlen Specter (R-PA), Sen. Conrad Burns (R-MT), Sen. Pat Roberts (R-KS), Sen. Richard Lugar (R-IN), Sen. Larry Craig (R-ID), Sen. Olympia Snowe (R-ME), Sen. Mark Pryor (D-AR), Sen. Thad Cochran (R-MS), Sen. Blanche Lincoln (D-AR), Sen. Evan Bayh (D-IN), Sen. Thomas Daschle (D-SD), Sen. Bill Nelson (D-FL), Sen. Charles Schumer (D-NY), Sen. Susan Collins (R-ME), Sen. Tim Johnson (D-SD), and Sen. Jim Talent (R- MO). 17 Congressional Record, available at https://www.congress.gov/congressional- record/2003/10/02/senate-section/article/S12377-1. 18 American Association of State Highway and Transportation Officials, “Freight-Rail Bottom Line Report,” 2002; Upper Great Plains Transportation Institute, North Dakota State University, “Small Railroads – Investment Needs, Financial Options, and Public Benefits,” 2002; ZETA-TECH Associates, Inc., “An Estimation of the Investment in Track and Structures Needed to Handle 286,000 lb. Rail Cars,” 2000.

The Section 45G Tax Credit and the Economic Contribution of the Short Line Railroad Industry

Table 5. Legislative History of the Railroad Track Maintenance Credit Effective Dates: Taxable Years Total beginning after Years Retroactive Prospective Legislation and before Covered Period Period

Bipartisan Budget Act of 2018 (Public 12/31/2016- Law 115-123, enacted February 9, 1/1/2018 1 year 12 months None 2018) Protecting Americans from Tax Hikes 12/31/2014- Act of 2015 (Public Law 114-113, 1/1/2017 2 years 11.5 months 12.5 months enacted December 18, 2015) Tax Increase Prevention Act of 2014 12/31/2013- (Public Law 113-295, enacted 1/1/2015 1 year 11.5 months 0.5 months December 19, 2014) American Taxpayer Relief Act of 12/31/2011- 2012 (Public Law 112–240, enacted 1/1/2014 2 years 12 months 12 months January 2, 2013) Tax Relief, Unemployment Insurance Reauthorization, and Job Creation 12/31/2009- Act of 2010 (Public Law 111–312, 1/1/2012 2 years 11.5 months 12.5 months enacted December 17, 2010) Emergency Economic Stabilization 12/31/2007- Act of 2008 (Public Law 110-343, 1/1/2010 2 years 9 months 15 months enacted October 3, 2008) American Jobs Creation Act of 2004 12/31/04- (Public Law 108–357, enacted 1/1/2008 3 years None 36 months October 22, 2004)

Capital Needs of the Industry

A more recent capital needs assessment by the Federal Railroad Administration (FRA) in 2014 finds that while short lines have made substantial progress in upgrading track (e.g., 57 percent of route-miles could handle the heavier cars as of 2010, up from 39 percent in 2002) substantial capital needs remain.19 Based on industry surveys and interviews with bankers and other experts, the FRA estimated that as of 2013 the short line industry required $5.3 billion in investment to meet capital needs over the next 5 years, mainly due to infrastructure needs of $4.2 billion. The FRA estimated that only 69 percent of these needs would be met with available funding, primarily cash flow (73 percent of funding), as it is difficult for short line companies to access private market financing, particularly infrastructure loans.

How the Credit Works

The section 45G credit is a business tax credit allowed for 50 percent of qualified railroad track maintenance expenditures paid or incurred in a taxable year by an eligible taxpayer. Qualified railroad track maintenance expenditures are gross expenditures for maintaining railroad track

19 Federal Railroad Administration, “Summary of Class II and Class III Railroad Capital Needs and Funding Sources,” October 2014.

The Section 45G Tax Credit and the Economic Contribution of the Short Line Railroad Industry

(including rail, ties, bridges, signals, crossings, tunnels, roadbed, etc.) owned or leased as of January 1, 2015 by a Class II or Class III railroad.

The credit is limited to the product of $3,500 times the number of miles of railroad track owned, leased, or assigned to the eligible taxpayer as of the close of its taxable year. The credit is assignable to any eligible taxpayer who makes qualified expenditures. An eligible taxpayer is (1) any Class II or Class III railroad and (2) any person that transports property using the rail facilities of a Class II or Class III railroad or that furnishes railroad-related property or services to such person.

Effectiveness

The most recent IRS Statistics of Income (SOI) data indicate that $241 million in section 45G tax credits were tentatively claimed in 2013, $171 million of which was by C corporations and the remainder by individuals.20 This indicates that the section 45G tax credit supported approximately $482 million of short line infrastructure investment in 2013, or roughly half the industry’s estimated $1 billion of expenditures for capital and track maintenance in that year.21

A major portion of short line infrastructure expense is the purchase and installation of railway ties.22 According to data provided by the Railway Tie Association (RTA), since enactment of the section 45G credit in 2004, railway tie purchases by the short line industry have grown at an annual rate of 6.3 percent over the period 2004-2016, compared to an annual rate of growth of 0.1 percent over the period 1988-2004 (see Figure 6). Purchases of ties by Class I railroads also increased, but by a much smaller amount, from an annual rate of 0.2 percent before the credit to 1.4 percent after the credit. After controlling through statistical analysis for various factors that normally predict railway tie purchases, RTA finds that approximately 1 million railway tie purchases annually by the short line industry are attributable to the section 45G tax credit – a 23 percent increase over the average of annual purchases for the period 1988-2016.23 Given the $50 average cost of treated ties, this amounts to an annual increase in purchases of $50 million.24

20 Due to limitations on general business tax credits, which include the section 45G credit, approximately one-third of tentative credits are claimed in a typical tax year. 21 Surveys by the ASLRRA and AAR indicate that the short line industry’s revenue in 2013 was approximately $4.2 billion, and expenditures for capital and maintenance of way are approximately 24 percent of revenue. See, ASLRRA, “Short Line and Regional Railroad Facts and Figures,” 2017. 22 Based on data provided by the Railway Tie Association on the number of ties purchased by the short line industry and the average cost of treated ties (approximately $50), the short line industry spent approximately $366 million on treated ties in 2013, and $404 million in 2016. Installation costs incurred by the industry are in addition to these expenditures. 23 Fred Norrell, “An Inquiry into the Effect of Tax Credits on Crosstie Purchases,” Railway Tie Association, March 28, 2018. 24 Data provided by the Railway Tie Association. Excludes the cost of installation.

The Section 45G Tax Credit and the Economic Contribution of the Short Line Railroad Industry

Figure 6. Railway Tie Purchases have Increased since Enactment of Section 45G

7% 6.3% 6% 5%

4% Short 3% Line Railroads

2% 1.4% Railway Tie Purchases Tie Railway Annual Growth Rate of Rate Growth Annual 1% Class I 0.2% 0.1% Railroads 0% Before Section 45G (1988-2004) After Section 45G (2004-2016) Source: Railway Tie Association.

One indicator of the quality of short line infrastructure investment is the industry’s improved safety record. Since enactment of the 45G credit in 2004, train derailments on short line rails have declined by 50 percent, from a rate of 4.72 per million train miles in 2004 to 2.37 in 2017 (see Figure 7). Short line railroad safety performance is now approaching that of the longer haul Class I railroads and has improved at a faster rate than Class I railroads over the period the 45G credit has been in existence.

Figure 7. Safety on Short Lines has Improved since Enactment of Section 45G 6.0 - First year of sec. 45G credit (2005) 5.0 4.72

4.0 Short Line Railroads 3.0

3.23 2.37 Miles

2.0

Class I Railroads 1.73

1.0 Train Derailments Per Million Train Million Per Derailments Train 0.0

Source: Federal Railroad Administration. Note: Class I data exclude Amtrak.

The Section 45G Tax Credit and the Economic Contribution of the Short Line Railroad Industry

Investment Incentives

Standard cost of capital analysis also indicates the section 45G credit provides strong incentives to invest in short line infrastructure.25 For instance, consider the case of a break-even, or marginal, investment in short line track maintenance that is below the section 45G per mile cap (i.e., an investment of less than $7,000 per track mile), such that the credit has maximum effect on investment incentives (i.e., the credit is fully utilized, either directly or through assignment to another taxpayer).26 In this case, the section 45G credit reduces the user cost of capital by 63 percent.27 Empirical estimates of the responsiveness of investment to changes in the user cost of capital indicate that such a reduction in the user cost of capital is associated with a 47.3 percent increase in investment (see Table 6).28

The same type of analysis indicates that for short line infrastructure investors the section 45G credit is a much more powerful incentive at the margin than the two major incentives contained in the Tax Cuts and Jobs Act (TCJA), namely:

1. The lower federal corporate income tax rate (21 percent in 2018, down from 35 percent in 2017). 2. 100-percent expensing for equipment in 2018 (up from 50-percent expensing, a.k.a. bonus depreciation, in 2017).

For instance, for a corporate taxpayer making a marginal investment in short line track maintenance, relative to 2017 law, the combination of the TCJA’s lower corporate tax rate and expensing for equipment reduces the user cost of capital by 1.2 percent, which is associated with a 0.9 percent increase in investment. Expensing has relatively little effect on short line investment incentives because short line investors previously were permitted to expense 75 percent of track maintenance expenditures under a safe harbor provided by IRS Revenue Procedure 2002-65.

Table 6. Impact of Section 45G Tax Credit and the Tax Cuts and Jobs Act (TCJA) on Cost of Capital and Investment for a Short Line Infrastructure Project Change in Cost Change in Tax Change of Capital Investment Section 45G Tax Credit -63.0% 47.3% TCJA (reduced corporate tax rate and expensing) -1.2% 0.9%

25 The user cost of capital is the real before-tax rate of return that a marginal (i.e., break-even) investment must earn to recover the cost of investment, pay taxes on business income, and pay an expected after-tax rate of return to investors that covers their opportunity cost. Further details on the calculations are provided in the appendix. 26 There is zero effect on marginal incentives for taxpayers above the section 45G cap. It is not known what percentage of taxpayers have expenditures in excess of the cap. 27 The section 45G credit may reduce the user cost of capital at the time an investment is made by a lesser amount under certain circumstances, including (1) for investments of more than $7,000 per track mile, (2) investments made in periods in which the credit was not yet extended (even if extended retroactively), and (3) investments by taxpayers who have difficulties in utilizing or assigning the credit. 28 We used a consensus of empirical estimates of the elasticity of investment with respect to the cost of capital (-0.75), which is for all business investment, not just railroad infrastructure investment. See, Kevin A. Hassett and R. Glenn Hubbard, “Tax Policy and Business Investment,” in Handbook of Public Economics, Vol. 3, edited by Alan J. Auerbach and Martin Feldstein, pp. 1293–1343, 2002.

The Section 45G Tax Credit and the Economic Contribution of the Short Line Railroad Industry

Current Legislation

The section 45G credit expired on December 31, 2017. Bills have been introduced in both the House and Senate to extend the credit on a permanent basis. The House bill (H.R. 721 - Building Rail Access for Customers and the Economy Act) was introduced on January 30, 2017 by Rep. Lynn Jenkins (R-KS) and originally co-sponsored by Rep. Earl Blumenauer (D-OR), Rep. Rodney Davis (R-IL), and Rep. Daniel Lipinski (D-IL). As of June 29, 2018, the House bill had 261 co-sponsors. The Senate bill (S. 407) was introduced on February 16, 2017 by Sen. Mike Crapo (R-ID) and originally co-sponsored by Sen. Debbie Stabenow (D-MI), Sen. James Inhofe (R-OK), Sen. Ron Wyden (D-OR), Sen. Jerry Moran (R-KS), Sen. Charles Schumer (D-NY), Sen. Roger Wicker (R-MS), Sen. Robert Casey (D-PA), Sen. Pat Roberts (R-KS), Sen. Richard Blumenthal (D-CT), Sen. Johnny Isakson (R-GA), Sen. Dean Heller (R-NV), and Sen. John Thune (R-SD). As of June 29, 2018, the Senate bill had 56 co-sponsors.

The Section 45G Tax Credit and the Economic Contribution of the Short Line Railroad Industry

Appendix: Methodology

Economic Impact Modeling

We used estimated short line industry revenues and the IMPLAN model to calculate the economic impacts of the US short line industry. 29 IMPLAN is a modeling system developed for estimating economic impacts and is similar to the Regional Input-Output Modeling System developed by the US Department of Commerce. The model is primarily based on government data sources.

IMPLAN is built around an “input-output” table that relates the purchases that each industry has made from other industries to the value of the output of each industry. To meet the demand for goods and services from an industry, purchases are made in other industries according to the patterns recorded in the input-output table. These purchases in turn spark still more purchases by the industry’s suppliers, and so on. Additionally, employees and business owners make personal purchases out of the additional income that is generated by this process, further increasing demand that ripples through the economy. Multipliers describe these iterations.

Economic multipliers are often used to measure the overall change in production that would result from a marginal increase in a particular industry. For example, a value added multiplier converts a $1 million increase in output of the short line industry into the total change in value added throughout the supply chain. Because some suppliers of US short line companies might use short line rail service, a marginal change in the short line industry could lead to an additional change in short line activity attributable to the services it provides its suppliers throughout the economy.

While this impact is appropriate to include when modeling a marginal change, when evaluating the overall impact of the industry these indirect, own-industry impacts should be excluded to prevent double-counting. Therefore, we have adjusted the IMPLAN model results to exclude any indirect or induced effects taking place within the short line industry.

Economic impacts are reported at 2016 levels.

Inbound Customer Reliance

To illustrate our methodology for estimating inbound customer reliance, Table A-1 provides a detailed calculation for the iron and steel manufacturing industry (a subset of the manufacturing industry shown in Table 2). The iron and steel manufacturing industry had 90,940 employees in 2016. Each job in this sector can be viewed as reliant on transportation services of coal and other inputs purchased by iron and steel manufacturers. These manufacturers spent $8.4 billion on transportation services of inputs (shipments in the final stage of transport), of which $5.0 billion was for rail transportation. Based on the short line industry’s share of the entire rail industry’s revenue (4.9 percent), we estimate that iron and steel manufacturers spent $241 million on short line transportation in 2016, or 2.9 percent of the transportation costs of iron and steel manufacturers. As such, we estimate that 2.9 percent of iron and steel manufacturing employment relies on transportation services provided by the short line industry, amounting to 2,620 jobs.

29 IMPLAN is a product of IMPLAN Group, Inc.

The Section 45G Tax Credit and the Economic Contribution of the Short Line Railroad Industry

Table A-1. Methodology for Estimating Inbound Customer Reliance on the US Short Line Industry, Iron and Steel Manufacturing Industry as Customer, 2016 Total Trans- Short Line Jobs portation Railroad Short Line Share of Reliant on Employ- Cost Cost Cost Trans- the Short ment* ($millions) ($millions) ($millions) portation Line Cost Industry 90,940 $8,371 $4,963 $241 2.9% 2,620 Source: PwC calculations using the IMPLAN modeling system (2016 database). Note: Details may not add to totals due to rounding. * Employment is defined as the number of payroll and self-employed jobs, including part time jobs.

Cost of Capital Analysis

The user cost of capital is the real before-tax rate of return that a marginal investment must earn to recover the cost of investment, pay taxes on business income, and pay an expected after-tax rate of return to investors that covers their opportunity cost. We calculated the user cost of capital for a marginal, equity-financed investment in short line infrastructure by a corporate investor, following the standard methodology used, for example, by the US Treasury Department and the European Commission.30 We accounted for the US corporate tax rate (inclusive of the average state corporate income tax), bonus depreciation for equipment, and the section 45G tax credit, assuming that the taxpayer is not subject to the section 45G per mile cap.31 We excluded all other taxes, such as shareholder taxes and property taxes.

Data for US corporate income tax rates come from the OECD database.32 The US combined statutory tax rate for 2017, assuming an average state corporate income tax rate of 6.01 percent, is calculated to be 37.58 percent. Under 2018 law, we held the average state corporate income tax rate constant at its 2017 value, and compute the US combined statutory tax rate to be 25.75 percent.

Following IRS Revenue Procedure 2002-65, we assumed that 75 percent of the infrastructure investment is expensed (under both 2017 and 2018 law). The remaining 25 percent we assumed is railroad track with a 7-year MACRS recovery period (double declining balance with a switch to straight line); we account for the half-year convention for the year placed in service as well as 50 percent bonus depreciation in 2017 and expensing in 2018.

We assumed a real interest rate of 5 percent and inflation of 2 percent.

30 See, for example, US Treasury Department, “Effective Tax Rate Model,” July 2014, available at https://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/New-Investment-Rates- Methodology.pdf; James B. Mackie III, “Unfinished Business of the 1986 Tax Reform,” National Tax Journal, June 2002; Christoph Spengel, Frank Schmidt, Jost Heckemeyer, and Katharina Nicolay, “Effective Tax Levels using the Devereux/Griffith Methodology: Final Report 2016,” Project for the EU Commission TAXUD/2013/CC/120, Centre for Economic Research (ZEW), October 2016, available at http://www.zew.de/en/publikationen/effective-tax-levels-using-the-devereuxgriffith-methodology-final- report-2016/?cHash=cd1beff16840b2d302fd63720247e358. 31 Because a majority of the section 45G credits are claimed by C corporations, we modeled the corporate income tax rather than the individual income tax that applies to pass-through business entity income. 32 The OECD database is available at http://www.oecd.org/tax/tax-policy/tax-database.htm.

The Section 45G Tax Credit and the Economic Contribution of the Short Line Railroad Industry

Based on these parameters we computed the percentage change in the cost of capital under the assumed change in tax law.33 Lastly, we translated the estimated change in the user cost of capital into an estimated change in investment using a consensus of empirical estimates of the elasticity of investment with respect to the cost of capital (-0.75).34 This elasticity implies that a 10 percent reduction in the cost of capital will increase investment by 7.5 percent.

33 The percentage change in the cost of capital reported in Section III is independent of the asset’s economic depreciation rate. 34 Kevin A. Hassett and R. Glenn Hubbard, “Tax Policy and Business Investment,” in Handbook of Public Economics, Vol. 3, edited by Alan J. Auerbach and Martin Feldstein, pp. 1293–1343, 2002.