By Larry Jones
March 29, 2004

The future of a leasing tax increase, which is attached to a comprehensive tax bill, H.R. 1637, is uncertain following a March 24 vote in the Senate which defeated an attempt to limit debate on the measure. The bill was pulled from the Senate floor following the vote and it is uncertain when or if it will be rescheduled for a vote. Regardless of the outcome of the broader tax bill, the leasing tax increase has bipartisan appeal and is likely to resurface in other legislative vehicles later in process as members look for ways to pay for tax relief in other popular areas.

All but one of the Democrats voted against ending debate after Republican leaders refused to allow a vote on a number of amendments sponsored by Democrats. These included a controversial amendment that would have blocked enforcement of a Labor Department regulation to end overtime pay for a number of workers. Following the 51 - 47 vote, the bill was pulled from the floor and it is uncertain at this time when or if it will be rescheduled for a vote. Under Senate rules, 60 votes are required to limit or shut off debate.

In the House, Ways and Means Committee Chairman William Thomas (CA) has not been able to generate enough support to pass similar bills, H.R. 2896 and H.R. 3167. Although he dropped the leasing tax increase and several other revenue raisers, the two bills have still failed to generate enough support. On March 25 House Speaker Dennis Hastert and other GOP leaders were discussing the idea of moving a revised bill that would focus almost exclusively on helping the nation's troubled manufacturers.

The Senate bill would impose a $21 billion tax increase on companies and investors that lease equipment and property to cities and other tax-exempt organizations over the next ten years. Reacting to the proposed increase, Conference Executive Director Tom Cochran said "We are concerned because this huge tax increase will undoubtedly be passed on to cities and other tax- exempt entities in the form of increased leasing costs. In the end cities will be forced to cut services or increase taxes to pay for the increase."

The Conference and other local groups in Washington oppose the leasing tax increase because it will not only drive up the cost of leasing but shut down lease financing which has been used extensively in the public and private sector since the early 1980s. In fact, the Federal Transit Administration encouraged municipalities to use lease financing to help supplement their transportation and other infrastructure needs up until last November when the practice was suspended. According to the Joint Committee on Taxation, local governments will lose an estimated $5.4 billion over the next ten years if this provision is enacted.

Cities have used lease financing or so called sale-lease back financing to expand and improve local infrastructure projects. Under this arrangement, an investor such as a bank enters a long term leasing arrangement to acquire city property such as a subway line. The investor pays the city a significant amount up front, which can be used to expand or improve the subway line. The investor then leases the property back to the city and is allowed to depreciate it and receive a federal tax deduction over the term of the lease. Senate Finance Committee Chairman Charles Grassley (IA) views these arrangements as abusive tax avoidance schemes and has pledged to end them, but only for municipalities and other tax-exempt organizations. The Conference sent out an alert on March 17 asking mayors to contact their Senators and urge them not to include the leasing tax increase in any final legislation.