In the last two decades, many states established rail promotion programs in an effort to limit the contraction of their railroad networks. Now federal funds for rail projects are nearly exhausted, and states must decide whether to expand considerably their levels of internal funding for short line investments. Such a decision requires a careful articulation of policy goals, combined with sound cost‐benefit techniques. Research shows, however, that states often fail to evaluate the full range of costs and benefits when considering rail investments. Instead, the economic development benefits of local rail service frequently are overstated, while the potential for rail investments to meet broader transportation planning needs is neglected. This paper evaluates the rationale behind state intervention in the rail industry, discusses the tendency of states to focus on economic development to the exclusion of other benefit categories, and presents summary results from an analysis of an investment project in North Carolina. The paper suggests that state funding for rail projects is more likely to be justified based on intermodal substitution benefits generated by local rail service, rather than the railroads' potential to increase job