By Larry Jones
March 15, 2004

By unanimous consent the Senate approved an amendment on March 3 that would impose severe limits on tax deductions exclusively for companies that lease equipment and property to cities, counties, states and other tax-exempt organizations. Although the measure is aimed at shutting down sale-lease back transactions, it is written so broadly it would apply to all leases including traditional leases of cars, trucks, copy machines and computers. The amendment was adopted in S. 1637, a broad package of tax proposals which include tax relief for manufacturers, the expansion of expiring tax credits and the repeal of an illegal U.S. export tax regime. The limits imposed by the amendment will increase taxes by an estimated $21 billion over the next ten years and the funds will be used to pay for part of the cost for tax relief. To offset this huge tax increase, companies will undoubtedly be forced to increase the cost of equipment and property leased to cities and other tax exempt entities.

The amendment calls for make radical changes in the tax rules which allow investors to take tax deductions for engaging in long-term sale-lease back financing. This financing technique allows cities to raise funds by temporarily transferring ownership of public property to an investor for the benefit of depreciating the property and taking a tax deduction. For example, to finance a transportation improvement project using sale-lease back financing, a city enters an agreement to temporarily transfer ownership of a subway line to an investor who agrees to lease it back to the city. Under this arrangement, the city receives funds to improve its transportation system and the investor is allowed to depreciate the property and take a tax deduction over the period of the lease. At the end of the lease, ownership reverts back to the city.

Under the proposed changes an investor will be required to meet several stiff new requirements to qualify for the tax deduction, all of which are contrary to long established practices in sale- lease back financing. These include requirements that the property leased must not be finance with tax-exempt bonds, tax-exempt entities must not monetize its lease obligation, and the investor must maintain a 20 percent equity investment in the property. By shutting down sale- lease back transactions, local governments will lose an estimated $5.4 billion over the next ten years on top of the increased leasing costs that companies will be forced to pass on to them.

The Senate is expected to resume consideration of S. 1637 the week of March 22. The House Ways and Means Committee is expected to meet and consider its version of the bill, H.R. 2896, the week of March 15. Rep. William Thomas(CA), who chairs the committee, has indicated he will include a modified version of the Senate's tax-exempt leasing provision in his proposal. However, he has indicated that his proposal will not have a retroactive effective date like the Senate proposal. The Conference sent a letter to all members of the Congress last month urging against changes that would drive up the cost leasing for state and local governments and eliminate sale-lease back financing without replacing it with funding through some other source.