ERIE - LACKAWANNA MERGER STUDY

Taxes on Operating Property

Study XVII

State taxes on operating property of Erie and Lackawanna totaled $12,263,308 in 1956, and corresponding taxes for the merged company would be somewhat lower.

The following assumptions were made in order to estimate the effect of merger on various types of state taxes as of 1956:

Methods of valuation prevailing in each state in the year 1956 would be used for the merged system.

Estimated savings under the merger would be subject to Federal income taxes at the full rate of 52%

The balance of the estimated savings from merger after Federal income taxes would be reflected in both net railway operating income and net income, even though the 5% interest on net cash required which,was included in total savings would not affect net railway operating income.

Tax values in general are based on combinations of the following three factors or minor variations of them.

Stock and bond market value.

Capitalized income.

Cost of reproduction less depreciation applied to physical property.

The various factors used by the states in which the merged system would operate were adjusted as far as possible to reflect changes from merger, and estimated system values were calculated and were allocated to the several states by the methods used in each state. If equalization factors were used in 1956, the same factors were applied to the new value to determine probable assessments.

In general taxes based on the value of physical property would decrease while the taxes reflecting income factors would increase. The net effect of merger is estimated to be a decrease in taxes of $25,000, but it should be emphasized that the merged company will be a much stronger property than the sum of the individual companies and that since state taxing policies have not always been uniform as between different railroads, the merged company might well be a target subject to substantial increases Which cannot now be fore-seen under taxing methods presently employed.