A State-Centered Approach to Tax Discrimination under § 11501(b)(4) of the 4-R Act

Imagine a railroad whose holdings span the country, connecting the nation’s largest cities and providing passenger and freight services that are critical to the economy’s functioning. State A, through which this rail line runs, finds itself nearing insolvency. Seeking funds but wishing not to upset its politically powerful voters, this state levies a tax exclusively applicable to railroads.

State B, a neighboring state, is more in need of money than State A and decides to impose a tax on all commercial enterprises within its territory. However, due to pressure from local interest groups, State B grants exemptions to trucks, barges, and aircraft. While far from the only business paying the tax, the railroad now finds itself at a severe competitive disadvantage as compared to other carriers.

State C adopts a third approach. This state notices that many common carriers within its jurisdiction—airlines, railroads, barges, and the like—are not local and levies a tax that applies to all transportation businesses on an equal footing. Although this tax applies to railroads and their competitors equally, such that none are at a competitive disadvantage, the predominantly local nontransportation firms are not subject to the tax.

Each of these situations disadvantages the railroad, but do any of them discriminate against it illegally? This scenario highlights a problem that has arisen in the interpretation of the Railroad Revitalization and Regulatory Reform Act (4-R Act), a comprehensive statute passed by Congress in 1976 with the purpose of restoring the financial sustainability of the nation’s railroads.