Railroads & Birmingham

Reading the Birmingham News this week brought to my attention the possible expansion of Norfolk Southern’s operation in Alabama through the creation of an intermodal facility in Birmingham. Interestingly, I had penned a short piece on tax incentives and railroads just about a week before I read that story. I’ve included it below for my own pleasure.

Tax policy can make a nation stronger or weaker, richer or poorer. Favorable tax decisions encouraged the growth of railroads, and resulted in a stronger United States. From early times tax policy was considered an important tool to cultivate the growth of industry, and in the case of railroads allowed states to leverage private capital to build the new infrastructure.

High taxes can retard development, and lower taxes can enhance profitability. Any entrepreneurial endeavor carries risk that the business may never become profitable. Numerous taxes would threaten the viability of railroads by creating “a heavy financial burden.”1 Before Art Laffer’s curve and before modern economics, Niccolo Machiavelli wrote about the relationship of tax policy, commerce and power; he asserted, “One man should not be afraid of improving his possessions, or another deterred by high taxes from starting a new business.”2

The increased chances for profit spurred private investment. John F. Stover concluded, “Most money for early railroads came from private investors.”3 This happened despite “an economy lacking adequate capital markets.”4 According to James W. Ely, tax exemptions were common during the early period of railroad construction, and allowed states to “harness private capital.”5

The construction of railroads resulted in a stronger nation that was more resistant to outside influence. The Baltimore & Ohio Railroad spurred the growth of heavy industry like Maryland’s iron and coal industries, which were both important elements just a few decades later in the American Civil War. Internal improvements were seen by George Washington as a way to protect “against British and Spanish incursions and interference. . . .”6 A blockade during the War of 1812 forced much of the nation’s commerce onto roads; railroads would provide better internal lines for trade and communication and eliminate dependence on sea traffic.

American power and industrial expansion were enhanced by favorable tax policies pursued by the states. Railroads spurred trade, created new industries, and reduced outside influence on the new country.

1 James W. Ely, Railroads & American Law (Lawrence, Kansas: University of Kansas Press, 2001), p. 34.
2 Niccolo Machiavelli, The Prince (New York, New York: Viking Penguin, 1981), 123.
3 John F. Stover, American Railroads, Second Edition (Chicago, IL: The Chicago University Press, 1997), 30.
4 Ely, p. 13.
5 ibid, p. 32.
6 Dilts, p. 16.