By Larry Jones
January 12, 2004

State and local governments will lose a significant revenue source if the Treasury Department and the Senate Finance Committee are successful in advancing proposals that will prohibit the use of sale-lease back transactions. Under these transactions, a state or local government enters into a long term arrangement in which capital assets such as railways, subways, sports stadiums, water lines and air traffic control systems are sold for a period of time to a corporation, which then leases them back to the state or local government. By investing in these transactions, a corporation receives a tax credit and state and local governments receive badly needed revenue up-front, which can be used to fund critical public service needs. At the end of the base period, ownership of the assets reverts back to the state or local government.

For two decades the Department of Transportation (DOT) has permitted state and local public transit systems to use sale-lease back transactions to generate additional revenue to support transportation and other critical needs. A number of requests are pending before DOT's Federal Transit Administration (FTA). These transactions are no different from the 40 or so transactions approved by the agency over the past years. Also, each leasing transaction is registered with the Internal Revenue Service.

These transactions provide state and local governments revenues to fund critical public services; and corporations receive a federal tax deduction on corporate income. This is not an uncommon practice, considering that state and local governments during the past three years have faced the worst fiscal crisis since World War II. And, in an anti-tax environment, most local communities have been forced to respond to an increasing number of federal mandates, which have caused them to spend significantly more on homeland security, education, health care and other critical public services.

Although sale-lease back transactions have been allowed in the past, the Treasury Department issued a November 26 letter asking DOT's Federal Transit Administration not to permit any more until further notice. The letter also notified DOT that the Treasury Department is in the process of evaluating these transactions to consider whether or not to issue new guidelines. Furthermore, the Senate Finance Committee conducted a hearing on the issue last fall. During the hearing, the committee chairman, Senator Charles Grassley (IA), criticized these transactions as "good old-fashioned tax fraud." He later introduced and was successful in getting the committee to approve language in the Jumpstart Our Business Strength Act (S. 1637) that would prohibit state and local governments from entering these transactions.

Grassley is now pushing to get the full Senate to consider the proposal as soon as possible. To further complicate matters, he is planning on modifying the proposal to change the effective date so the legislation can take effect retroactively on November 18, 2003 instead of on the date of enactment. With Congress reconvening on January 20, a number of Senate staffers believe it is unlikely the bill will be scheduled for a vote before March 1. And, even if it is approved on the Senate floor, it must still be adopted by the House.

Both business and local governments have expressed concerns about the proposed changes. In a letter to House Speaker Dennis Hastert (IL) last fall, Chicago Mayor Richard M. Daley told him that the provisions in Grassley's proposal "could seriously affect the city's budget and I request your immediate assistance in helping to make sure they do not get included in the House version of the bill or in any final legislation."

Since 1995, the city of Chicago has received more than $110 million from sale-lease back transactions. Daley told Hastert that the city has submitted requests for two new transactions, which are pending before DOT's Federal Transit Administration. These transactions are expected to generate about $30 million in revenues. In a letter to the city last November, FTA Deputy Administrator Robert Jamison notified city officials that, at the request of the Treasury Department, the agency was suspending consideration of its requests for the new transactions. Although the city has asked the agency to reconsider its decision in light of the fact that the city's requests were submitted before the Treasury letter was issued, it has not received a reply.

So far, Grassley's proposal has not been inserted in the House version of the bill, H.R. 2896. After receiving Daley's letter, Hastert, who took a hands off approach when the bill was introduced earlier last year, endorsed the House proposal in November. The Chamber of Commerce also endorsed the measure on January 6. However, the bill still faces some tough challenges and has come under fire for its $60 billion, 10-year price tag to provide tax relief to U.S. manufacturers. Members from both parties do not want to see the measure drive up the federal deficit, which already stands at a record high level.