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EXHIBIT VI AGGREGATE WATERWAY FULE TAX COLLECTIONS FROM WATERBORNE MOVEMENTS OF GRAINS AND SOYBEANS

UPPER MISSISSIPPI BASIN ORIGINS TO RESPECTIVE DESTINATION AREAS (At 60 cents per gallon (equivalent to 1.80 mills per ton-mile), on 1975 ton-miles carried (thousands of dollars)]

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1 St. Paul District includes Minnesota River and Mississippi River within Minnesota. ? Upper Mississippi River: Mississippi River between Minneapolis and the mouth of the Missouri River. 3 Middle Mississippi River: Mississippi River between the mouth of the Missouri River and the mouth of the Ohio River. Source: Calculated from the ton-miles tabulated in exhibit IV at 1.80 mills per ton-mile.

EXHIBIT VII

WATERWAY FUEL TAX AT 42-CENT-PER-G ALLONCOST PER BUSHEL OF GRAIN AND SOYBEANS (AT 33.33 BUSHELS PER TON)UPPER MISSISSIPPI BASIN ORIGINS TO RESPECTIVE DESTINATION AREAS

(In cents per bushel]

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1 St. Paul district icludes Minnesota River and Mississippi River within Minnesota. ? Upper Mississippi River: Mississippi River between Minneapolis and the mouth of the Missouri River. 3 Middle Mississippi River: Mississippi River between the mouth of the Missouri River and the mouth of the Ohio River, Source: Calculated from the tonnages of exhibit II and the aggregate tax collections of exhibit V.

EXHIBIT VIII

'WATERWAY FUEL TAX AT 60-CENTS-PER-GALLON COST PER BUSHEL OF GRAIN AND SOYBEANS (AT 33.33 BUSHELS PER TON)—UPPER MISSISSIPPI BASIN ORIGINS TO RESPECTIVE DESTINATION AREAS

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1 St. Paul district includes Minnesota River and Mississippi River within Minnesota.
2 Upper Mississippi River: Mississippi River between Minneapolis and the mouth of the Missouri River.
8 Middle Mississippi River: Mississippi River between the month of the Missouri River and the mouth of the Ohio River.
Source: Calculated from the tonnages of exhibit II, and the aggregate tax collections of exhibit VI.

The Unsettled Question of Competitive Railroad Rates The tabulated shipments of Exhibit VII from other origins (the upper and middle Mississippi, the Missouri, and the Ohio) are more largely rail-competitive, both to the Gulf and via east-west railroad lines to the Atlantic. Some increases in railroad rates could be expected in consequence of the fuel tax, somewhat restraining the water-to-rail diversion. On the other hand, barging charges on some movements are now too low to attract railroad competition, and the higher waterway charges consequent on the tax might well make it attractive for the railroads to capture some of this traffic with reduced rates. The probable railroad response to the waterway fuel tax has not been evaluated, and, until it is, no adequate estimated of the prospective tax-induced shrinkage can be made.

The Prospect for Rising Tax Rates on Declining Waterway Traffic It would appear clear from the above analysis that, including both Seaway and rail diversion, the fuel tax of 42 cents a gallon would induce a shrinkage of at least 20 percent in the waterborne tonnage of grains and soybeans from the upper Middle West. Similar reductions in other commodity movements, such as coal, gasoline, fuel oil, and fertilizers, should be expected. If an all-commodity 20 percent reduction were to occur, obviously, to recover the targeted dollar amount of Federal costs would require an increase in the fuel tax rate from 42 cents to 5212 cents a gallon.

At 5212 cents, further reduction would appear inevitable, and the rate would have to be raised again. There is no way at present to determine the ultimate

1 U.S. Dept. of the Army. Corps of Engineers, Waterborne Commerce of the United States, Calendar year, 1975, Part 5, "National Summaries”, Section 2, Vicksburg, Mississippi, 1977.

2 See for example: William E. Mooz, Energy in the Transportation sector, The RAND Corporation, Santa Monica, California, March, 1973, estimating water carrier fuel consumption ať 500 Btu. per ton-mile, equivalent at U.S. Bureau of Mines conversion factors to 3.7 gallons per 1,000 ton-miles.

The three-gallon estimate employed in this report was derived from a survey I conducted in 1975 of all ICC-regulated shallow-draft water carriers on the Mississippi River and its tributaries. Response was 100%. Consumption in 1975 was at the rate of 2.9 gallons per 1,000 ton-miles carried.

3 For ton-miles of farm crops carried nationwide, in 1975, see: U.S. Dept. of the Army, Corps of Engineers, Op. cit., Section 3, pages 96.

* Letter from the Office of the Chief of Engineers to The Ohio Valley Improvement Association, Inc., Cincinnati, Ohio. March 17, 1961.

6 Clinton B. Odell, Vice President, Cargo Carriers, Inc. "Benefits from Extension of the Navigation Season". Proceedings of the Joint Conference of the Lake Carriers' Association and the Dominion Marine Association, Lake Carriers' Association, Cleveland, Ohio, February 8, 1977. The reported present charge for barging grain from Minneapolis to Baton Rouge of $6.19 per ton, or 18.6 cents per bushel, amounts to 3.67 mills per ton-mile of river distance.

rate at which fuel tax revenues would catch up with Federal outlays. As a limited indication, in Exhibits VI and VIII we present impacts at 60 cents a gallon. It will be noted that, at 60 cents, the tax would range from 3.0 to 12.0 cents per bushel.

Closure of Selected River Segments as a Means of Cost Recovery Waterway use taxes or user charges at the levels advocated by Senator Domenici present the Congress with the inherent linkage between cost-recovery waterway user charges and the national program of waterway maintenance and improvement. Pursuit of the cost recovery goal inescapably implies curtailment of waterway expenditures.

Let us note why this is true. The dilemma we have described of rising tax rates on declining traffic can be resolved most effectively by closing selected segments of the waterway system to commercial navigation. We have said that the Federal costs of waterway operation and maintenance are fixed. But, this is true only if all existing waterway segments are kept in operation. Federal costs of operation and maintenance can, in fact, be substantially reduced by closing selected tributary rivers and other segments to navigation. The probability is high at this would prove to be the only feasible way in which 100 percent of these costs could be collected.

The closure of higher-cost rivers carrying lighter traffic would reduce Federal outlays more than it would tax collections. Closure would thus bring Federal costs down to amounts greater than the decline in tax collections and achieve the targeted Federal cost recovery at a tax rate which, while substantially higher than 42 cents a gallon, would remain less high than if all waterways were to be kept in operation.

Illustrative River Segments Vulnerable to Closure Should Congress enact the 42-cent tax, therefore, it would be an entirely logical accompanying step to incorporate into the legislation a statement of standards for termination of navigation on particular rivers, or, possibly, a statement of particular rivers in line for priority for closure. Promising candidates for this classification would include the Missouri, the Arkansas, the Cumberland, the Allegheny, and some reaches of the Tennessee and the upper Mississippi. A careful analysis of the responsiveness of traffic to fuel tax imposition on each of these rivers should, of course, precede such determination.

The Missouri River may be a suitable illustration. In 1975, this river carried 1.1 billion ton-miles of commercial cargo.® Federal outlays for operation and maintenance amounted to about 9.7 million. At the U.S. average rate of fuel consumption, the tax of 42 cents a gallon on the Missouri would have yielded on the 1975 ton-mileage a revenue of only about $1.4 million. Admittedly, fuel consumption per ton-mile runs somewhat higher on this river than the U.S. average, but it is clear that Federal revenues under the 42-cent tax would fall far short of outlays for operation and maintenance.

Thus, if the Missouri were to be closed to navigation, Federal costs of operation and maintenance would be reduced substantially more than tax collections. The same action on other rivers such as those named in the preceding paragraph could bring the cost-recovery goal within sight. Cost-recovery user charges and segment abandonment are thus Siamese twins and very probably inseparable.

Cost-Recovery as a Nonstructural Alternative to Waterway Improvements Observations similar to those preceding apply also to new work, that is to projects for replacement and modernization of locks and dams and to waterway extensions. Recovery of 50 percent of construction outlays could be achieved only by the abandonment of the more costly projects. Such abandonment would reduce the magnitude of costs to be recovered, as in the case of operation and maintenance and bring the cost-recovery goal down to a level which could be financed by the tax collections.

U.S. Dept. of the Army Corps of Engineers, Waterborne Commerce of the United States, 1975. Part 2, Vicksburg, Mississippi, 1976, page 9.

? U.S. Dept. of the Army, Annual Report of the Chief of Engineers on Civil Works Activi. ties, Vol. II, Washington, D.C., 1977, page 20-22.

Cost-Recovery as a Formula for Adverse Benefits-Cost Ratios But, the impact would be given more direct. Taking, for example, such projects as the replacement of Locks and Dam No. 26 on the Mississippi River, the twinning of the locks on the Illinois, and the completion of the Tennessee-Tombigbee connection, the Congressional authorization and funding of such undertakings rest directly upon a favorable ratio of prospective benefits to costs.

With respect to each project, the estimated benefits consist primarily of projected tonnages of traffic over the 50-year service life (now to the year 2035 or 2040) multiplied by the transportation savings per ton. Both of these would be sharply reduced by the proposed 42-cent fuel tax, or by any user charge at this level of cost recovery, and the presently favorable economic evaluations radically impaired or reversed. It must be emphasized that this impairment would occur even in the ab

or the prospective traffic reductions we have previously considered probable. The U.S. Secretary of Transportation has recently expressed the opinion that, under a fuel tax of 42 cents a gallon, waterway traffic would continue to grow, but at a reduced rate. Let us assume for the moment that the Secretary is right.

The present economic justification of each waterway project, such as that at Gallipolis, Ohio, Locks and Dam No. 26, the Illinois River, and the TennTom, rests directly upon a projection of traffic growth over the coming 50 years in the absence of any waterway use tax or user charge. Even on the optimistic assumption that the 42-cent tax would permit some continued growth, such growth would obviously be at a much lower rate than that now projected, and, for any future year, the tonnage would be projected at a substantially lower level than that on which present economic evaluation rests. And, to this reduced tonnage projection, a lower savings per ton would be applied.

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Suspension of Authorization and Funding for Reevaluation The impact would be accentuated by still another factor. Obviously, the present benefits-cost ratios on which existing authorizations and funding pro. grams rest would become obsolete and irrelevant. Congress could authorize new projects and fund those now ongoing only on the basis of new evaluations. Because, in its application to new construction outlays, the tax would vary considerably from year to year and because the tax rates would be rising during the phase-in period, existing shipper surveys and statistical procedures would have to be substantially revised before new evaluations could be undertaken. Adding to the time required for such revisions the evaluation period itself, unless the Congress were willing to act without meaningful evaluation, all progress toward authorization and funding of construction projects would be arrested for probably some three years or more. During this period the construction costs and interest charges against each project, to be balanced against the reduced benefits, would be substantially increased, further impairing the present economic justifications.

Cost-Recovery as a Non-Structural Relief of Lock Congestion Finally, the effect on lock congestion merits attention. This is a critical consideration at Gallipolis, Locks No. 26, and on the Illinois River. We have noted previously the prospective diversion of grains and soybeans from the St. Paul District, Chicago, and the Illinois River to the St. Lawrence Seaway. Downbound movements from all these origins now transit Locks No. 26, and those from Chicago and the Illinois River transit the Illinois River locks as well.

Altogether, in 1975, these movements accounted for 10.5 million tons of the 54.5 million-ton total transited at Locks No. 26. If we were to add similar diversions of such commodities as coal, petroleum products, fertilizers, chemicals, and steel, there is a very real prospect that the present congestion would be eliminated as the tax rate went up, and that congestion as a justification for new work would disappear. In a very fundamental sense, the cost-recovery taxes, whether in the form of a fuel tax or otherwise, at Senator Domenici's standards is a direct alternative to expansion of lockage capacity. Under the tax, the expanded capacity would be less needed, if needed at all.

In sum, we have previously noted, with respect to recovery of operation and maintenance outlays, the dilemma of rising tax rates on diminishing traffic. The dilemma would be less critical, however, with respect to recovery of -50 percent of construction outlays. The dilemma resolves itself by the very probable disallowance, under existing benefits-cost standards, of most of the major and more costly projects now on the drawing boards. Under present standards, new work outlays to be recovered would automatically be reduced to a much lower and more easily-attained level.

CRITICAL QUESTIONS REMAINING

The Response of Alternative Modes and Routings In conclusion, it must be emphasized that this report does not constitute an impact study. It is to be hoped that it does provide basic data from which an impact study might proceed. But, it would appear critical that some assessment be made of the competitive response of alternative routings, in particular that of competitive railroad rates, alternative railroad routings, diversions of important commodity movements, not to railroads, but to pipelines and trucking, and, finally, of the alternative of the St. Lawrence Seaway and the probable effect on the level of Seaway tolls.

Unless such an analysis is made, the prospective impact of the proposed user charge on the volume of shallow-draft water carriage cannot be estimated. The U.S. Department of Transportation has recently advanced purported estimates as to prospective diversion. Only if the Department has identified alternative routings and estimated consequent rate changes by alternative modes ban these estimates be taken as anything but preliminary and superficial.

Effect on Particular Economic Activities and Regions It would appear reasonable that an adequate impact study would weigh the effects on certain areas of national policy. Farm income, for example, would be adversely affected by lower realized prices for farm crops and by higher costs of fertilizer and energy forms. Energy policy would be involved in higher-cost distribution of coal, gasoline, and fuel oil. Regional development is involved in such water-based economies as that of the Appalachian Region and the Ozarks. The impact on the balance of payments should be examined, particularly in the effect on the export of farm products and the competitive position of waterborne steel from the Pittsburgh and Chicago Districts confronted by foreign competition on the Gulf Coast and in the lower Mississippi Valley.

The Question of Benefit to Railroads It would seem very important that the impact within the transportation system, itself, should be eva uated. Railroad competition has be a central consideration with regard to use taxes on the waterways. We have seen that the proposed use taxes would be very selective both regionally and as to commodities affected. Which waterborne commodities are clearly rail-competitive, and what railroads and railroad routings are involved? How much would the proposed use taxes aid these railroads and routings? What would be the adverse effect of waterway use taxes on cross-river railroads now deriving substantial revenue from rail-water and water-rail movements? In short, viewing waterway use taxes as a possible aid to the nation's railroads, how much would it help the railroads, which ones would it help, and which ones would it injure?

Transportation Charges and Rising Commodity Costs and Prices The effect on costs and prices of commodities is clearly of concern. From 1974 to 1976, the revenue per ton-mile of the nation's Class I railroads went up by 18.4 percent.* That of the ICC-regulated water carriers on the Mississippi River and its tributaries increased by only 3.5 percent.

& Association of American Railroads, Yearbook of Railroad Facts, 1977 Edition, WashIngton, D.C., 1977, page 33.

Interstate Commerce Commission. Revenue and Traffic of Class A and B Water Carriers, Statement No. 650, Washington, D.C., respective years. The ICC-regulated carriers on the Mississippi River and tributaries carried 40.6

percent of the total shallow-draft ton-miles moved on the Mississippi River system in 1975. From 1975 to the first six months of 1977, their revenue per ton-mile declined from 5.3 to 5.1 mills.

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