Joseph Farrell, President The American Waterways Operators, Inc.

Recently, then Secretary of the Treasury Donald T. Regan released for public scrutiny the Treasury Department's report to the President proposing "tax reform for fairness, simplicity and economic growth." I doubt that any individual would quibble with the objectives set forth in the title of Secretary Regan's report, which examines, in some 700 pages, the present tax system, and makes sweeping recommendations for change in that system to further those admirable goals.

Fairness, simplicity and economic growth are indisputably laudable aims, and the concept of a tax system based upon these principles would seem to have near universal appeal.

It is important to question just exactly what Secretary Regan means by this high-minded document; and, perhaps more significantly, why has this document not been publicly and ardently embraced by members of Secretary Regan's own party and Administration, and particularly by the Secretary's previously friendly backers in big-business.

I would like to speculate on upcoming legislation in the 99th Congress affecting improvements to the inland waterway system and the financing of those improvements, and to examine the merits of such legislation.

I cite Secretary Regan's tax reform proposal at the outset to underscore what I believe to the premier issue regarding the taxation process generally, and the issue of proposed higher waterway user fees in particular. That issue is fairness.

But first, the upcoming battle over increasing user fees to finance necessary improvements to the nation's waterway system will be fought on much the same turf, will feature pretty much the same principals, and will center on essentially the same issues in the 99th Congress as was the case in the 98th Congress.

The Administration has not provided us with its specific proposals regarding the financing of inland waterway improvement projects as this is written. But it is a relatively risk-free conjecture that the Administration will aggressively seek new and higher user fees from the water carriers to fund any improvements when it finally does deliver a budget to the 99th Congress. In the Con- gress, bills have already been introduced, or will shortly be introduced, which essentially restate the proposals contained in initiatives which were considered in the 98th Congress.

I know that the particulars of these bills, which essentially propose once again initiatives which were ultimately unsuccessful in the previous session, are well known to members of the transportation fraternity.

The rather more philosophical questions which underlie both the Administration's position on the matter of user fees and the majority congressional position on the subject, which differ markedly, deserve our careful attention.

Here the questions of fairness and intent ought most appropriately to be raised. Specifically, what exactly is the intent of the higher user fee proponents, and is the philosophical premise upon which their intentions rest both fair and sound? In order to reach an informed conclusion about this question, it is worthwhile to look at the higher user fee proponents and to examine their arguments.

But first, let us have a look at ourselves— to clarify just who the commercial water carriers are, and to define exactly our mission for the reader. Throughout the forthcoming congressional debate, it is imperative to remember that the commercial water carriers are, collectively, far more than merely a group of business enterprises dedicated solely to generating profits for the principals who control them. It is important to recognize that we serve the nation, at the same time we serve our own commercial interests. That is true of all the transportation modes. We sell a service, not a product.

And, beyond merely the commercial prosperity made possible by our work, please consider the vital link the waterway industry has always played in the movement of armament and materiel in time of emergency and international conflict. In addition, our rivers and harbors are national treasures. They need maintenance and repair. The men and women who work the rivers and man the harbors work to enhance this treasure. That fact needs recognition.

Despite all this, there are those who argue that we—the commercial navigation industry—should pay for all needed repair, expansion, improvement and maintenance of the waterway system, regardless of who benefits from the system, regardless or regional economic sustenance, regardless of protection of life and property afforded by this work.

Therefore, the upcoming debate on Capitol Hill will center on the strength of the postions of those who hold that higher user taxes are an appropriate vehicle of debt retirement as well as a trumped up safeguard against pork barrel boondoggles, pitted against those who argue that our industry's activities are in the national interest with a national beneficiary/constituent base, and that it is inappropriate to add further user taxes onto the already overburdened shoulders of such industries as the commercial water carriers. Who will win this debate is uncertain.

What is quite certain—indeed unequivocal— is that the treatment that the various segments of the transportation community receive, and have come to expect, from the federal government is neither fair, simple nor conducive to the promotion of economic growth. There is no debating that fact.

Consider the case of the airline industry. In that industry there is a user tax. But airline user taxes take the form of a direct tax on the real user of airline services—the customer.

The airline user tax manifests itself as a tax on individual tickets.

It is a tax which is inescapable—all direct, or real, users of the service provided must pay this tax.

The federal government softened the blow greatly in extracting user taxes from the airline industry by insuring that these taxes could be directly passed along to the consumer.

It seems only fair to expect the federal government to extend a similar treatment to our industry. The user taxes we now pay in the reality of today's marketplace cannot be directly passed along to our customers.

The reality of overcapacity and underutilizations of the waterway system serve to insure that our carriers must absorb the cost of higher user taxes themselves.

Yet, in considering still higher user taxes on the inland water carrier industry, nobody in government seems the slightest concerned with the simple fact that for us these taxes are not recoverable, we must absorb them—and we simply can't afford it.

Consider also the case of the trucking industry. A few years ago, members of the Administration took a look around for some revenue enhancements—called "taxes" by most folks—and hit upon the idea of levying a huge user tax on the trucking industry. This user tax was to manifest itself in two forms, as a tax on fuel and as a tax on the vehicle itself, the truck. The tax took the form of the Surface Transportation Assistance Act which was passed by the Congress and signed into law in 1982.

Proponents of these taxes, which were exhorbitant considering the real financial condition of the trucking industry at that time, initially turned a deaf ear to the screams of outrage which emanated from the organized trucking lobby in response to the proposed tax increase.

After all the applause had died down, somewhat more sober elements in the Administration and in the Congress began to look at the real condition of the trucking industry as opposed to its outdated reputation as a bloated, protected special interest. These more sober elements rather quickly came to realize— ex post facto—that the fat cut by the truck tax bill was not fat or excess at all, but rather vital flesh and lifeblood.

The trucking companies were being hit at just the wrong time. The Motor Carrier Act of 1980 had deregulated the trucking industry and this deregulation wreaked bloody havoc on the motor carrier community.

Whatever one might think about the philosophical efficacy of deregulation, there is no question that an industry, regulated by government from it's infancy, suddenly thrust into a "free market" environment is going to suffer considerable dislocation in transition. This certainly happened to the truckers.

What also happened to the truckers at precisely the same time was a full-blown recession. Products were not moving and as a consequence, trucks were not rolling.

Eventually, responsible people in government looked at their handiwork and realized that they had made a very grievous error, and rescinded a fair amount of the tax.

Why is a similar courtesy not extended to the inland water carrier industry? Rather than taking a responsible and reasoned look at the economic plight of the water carrier industry in the course of deliberations about the efficacy of user taxes, some elements in government propose still higher taxes on our industry at a time when we are in an economic predicament at least analagous— really far worse—than our brothers in the airline and trucking industries.

Proponents of higher user taxes on our industry must explain why similar consideration is not given to our economic condition when the government considers higher user fees as was extended to the airline and trucking interests if the financial condition of those industries is pertinent to the debate over the advisability of extracting higher user fees from the airlines and the truckers, why is it not pertinent to the debate over higher user taxes in our industry? The answer is that the government dispenses its largesse selectively, and that is not always proper.

While on the subject of government largesse, let us consider the case of the railroad industry. Consider specifically, Conrail. I am happy to report to you that things are going fine. Things are going so well, in fact, that Conrail has emerged from the protective warmth of mother government's apron and— with a little push from mom—has decided to go out into the world and seek his fortune on his own.

The next time someone tells you how much it will cost to send your children to college, remember and be thankful that you were not called upon to raise baby Conrail to his majority. Or perhaps more accurately, try to forget that you actually did help raise the little railroad to manhood— despite the fact that mother government claims full credit for Conrail's performance. And make no mistake about it, his performance has been remarkable. A straight "A" student, if you will.

Certainly baby Conrail concentrated in one of the more marketable disciplines on his way to maturation.

So marketable is baby Conrail that he is now up for sale—at the firesale price of about 1.2 billion dollars.

Mother government is considering only selected bids for baby. At present, there are only three remaining bidders for Conrail: the Marriott Corporation, the Allegany Corp. and the Norfolk and Southern Railroad. This last bidder, the Norfolk and Southern Railroad is considered by the same mother government who is offering baby Conrail for sale—different branch—as a "revenue inadequate" railroad.

Mother government is really pulling a fast one on the American public in the whole Conrail episode. The total federal bailout of the previously strapped railroad cost 7.2 billion dollars—you paid.

What's more, last year Conrail showed a profit of one half billion dollars. This money was not returned to you in consideration of the 7.2 billion dollars you earlier provided baby Conrail for his upkeep, maintenance and basic business education.

Despite baby Conrail's profitability last year mother government gave our boy an allowance of 300 million dollars.

And here is the real kicker: For whichever bidder ultimately is successful in obtaining baby Conrail, there is a bonus that in the world of business is really too good to believe.

Conrail comes without liability, without debt, without obligations of any kind to the purchaser.

Without any program for repayment of your 7.2 billion dollars.

Mother government can really dole out the goodies when it comes to her favorite son.

But enough of the saga of Conrail.

Let's have a look at some other railroads which also receive a fair amount of consideration, not to say largesse, from the federal government.

All four are deemed by the federal government as revenue inadequate.

Keep that in mind as we examine the real financial condition of these companies. Financial data on these companies is readily available— they are publicly held. What that data reveals makes for a hard case for those who suggest that these railroads are not revenue adequate.

The data reveal them to be highly profitable enterprises by any conventional business yardstick.

Witness the financial condition of CSX Corp. in taxable years 1981- 1983, CSX Corp not only paid no federal tax whatsoever, on profits of 1.75 billion dollars, but received rebates of taxes paid in earlier years or sold "excess" tax benefits to the extent that the corporation actually got money back from the federal government. Even more difficult to substantiate in light of the government's position on the revenue inadequacy of CSX Corp., is that supposedly strapped corporation's near magical ability to come up with 1.06 billion dollars to purchase Texas Gas Resources, parent company of one of the nation's largest independent barge companies with which CSX Corp. directly competes—an acquisition which I believe is in direct contravention of the Panama Canal Act which expressly forbids such monopolistic mergers.

Leaving aside the acquisition and monopoly issue which is now before the courts, where did a revenue inadequate corporation get 1.06 billion bucks to buy another company?

And perhaps more pertinently, why does such a company get a rebate; check from the federal government?

Why does it pay no federal income tax?

Consider the Santa Fe Southern Pacific Corp., another railroad judged to be revenue inadequate by the government, despite profits in taxable years 1981-1983 of 1.5 billion dollars, on which the company paid absolutely no federal income tax and yet was sent a very substantial rebate check by that same government.

Then witness the Burlington Northern—yet another revenue inadequate railroad with tidy profits in the 1981-1983 taxable period amounting to 1.7 billion dollars.

Again, no tax. Again, a substantial rebate.

Witness also Norfolk Southern Corp. which as mentioned is one of the finalists in the contest to purchase Conrail. Needless to belabor the point—Norfolk Southern is, of course, revenue inadequate. This despite profits in taxable years 1981-1983 of a respectable 574 million dollars.

The question one unfamiliar with the rarified practices of government might ask is: If I correctly under- stand the determination of revenue inadequacy to mean an inability to make basic costs, how come these supposedly revenue inadequate companies are at the same time so profitable and flush with cash that they are buying barge lines, bidding on baby Conrail and generally behaving like robust, healthy businesses?

A more pertinent question might be: If I correctly understand the ruinous financial condition of the inland barge industry, how come these companies are not, at least for a time, put behind the benevolent apron of mother government rather than made subject to still higher user taxes in their time of need?

Above all, where is the fairness in all this?

The answer is that all three questions are, while legitimate, inherently naive. Jack Kennedy provided the answer to all three of them at once in a brief quip: "Life is unfair." Actually, it has taken 20 years for another Harvard Man—this one a Republican—Donald T. Regan, to use the forum of a Cabinet-level office to address in a broader, more philosophical sense, these same questions. The Secretary of the Treasury calls for fairness and simplicity across the board in our tax system. This includes the transportation system. And that system includes the inland water carriers.

In a fair system, a company cannot be revenue inadequate and flush with cash at the same time. In a fair system, a company should not be on the ropes financially and yet be asked to pay still higher user taxes at the same time. It's just not defensible.

Our national leadership must recognize the severity of our industry's plight, and consider the crucial role we play in the transportation system and the overall economy. Laws and regulations must be directed at protecting the public and nurturing the industry, and not at inhibiting it any further. In a study on the financial performance of 15 of the nation's leading barge companies conducted by Arthur Andersen & Co., the combined revenue declines were well in excess of 10 percent between 1980 and 1982. From operating profits of about $125 million in 1980, the companies lost nearly $30 million in 1982. The losses in 1983 were in excess of $40 million, and the downward trend continues. This study focused on the major companies, and does not address the economic problems faced by the smaller companies, many of which have been forced to close their doors over the past two years.

In light of this gloomy data, it is up to the higher user fee proponents to explain how their proposals are consistent with the goals of promoting a tax reform system predicated on fairness, founded in simplicity and dedicated to promoting economic growth; a goal which, assuredly, all fair minded people would agree is both desirable and long neglected.

Fairness, simplicity and economic growth. We agree with Mr. Regan, that these should be the watchwords.

Maritime Reporter Magazine, page 37,  Feb 15, 1985

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First published in 1881 Maritime Reporter is the world's largest audited circulation publication serving the global maritime industry.