By Larry Jones
May 24, 2004

The Senate approved a comprehensive corporate tax bill (S. 1637) on May 11 that includes provisions that would eliminate sale-lease back financing. This program is used by a number of cities to help finance infrastructure expansion and improvement projects. Senate GOP leaders agreed to allow votes on several controversial amendments after Democrats used procedural roadblocks to stall action on the measure for months. The Senate adopted an amendment offered by Senator Harkins (IA) that would invalidate portions of a Labor Department regulation that would have caused some workers to lose eligibility for overtime pay. Another labor amendment offered by Senator Maria Cantwell (WA) to extend unemployment benefits was not adopted. The Senate also adopted an amendment that would provide $18 billion in energy tax incentives (See related box at right). Also, a number of expiring tax credits were extended, including the permanent extension of the Work Opportunity Tax Credit and the Welfare-to-Work tax credits.

Local and state governments, regional transit authorities, port authorities and municipal-run utility companies across the nation stand to lose an estimated $5.4 billion over the next ten years if the Senate bill is enacted. These entities currently receive a significant amount of financial support from sale-lease back transactions. Without this support, taxes and fees in a number of areas will most likely have to be increased to make up for the lost revenue.

In these arrangements, for example, a city temporarily sells property such as a subway line to a bank or another investor who agrees to lease it back to the city. The city receives funds at the beginning of the transaction, usually about three to five percent of the assessed vale of the property, which can be used to expand or improve the subway line. The investor is allowed to depreciate the property each year and receive a tax deduction over the period of the lease. This type of financing has been around for decades and federal agencies have encouraged local and state agencies to use it to help support their infrastructure costs. But now, the Senate needs to generate revenue to provide a huge tax break to manufacturers.

Under the Senate bill, $170 billion would be provided in tax relief to manufactures over the next ten years. To pay for this relief, the Senate adopted a number of revenue-raisers, including the elimination of sale-lease back financing, which would raise an estimated $39 billion. Senate Finance Committee Chairman Charles Grassley (IA) and Treasury Department officials claim that these transactions are nothing more than abusive tax shelters. That's why language was included in the bill to shut them down. This would be achieved by imposing severe limits on tax deductions for sale-lease back transactions. Several new strict limits would be applied retroactively to November 18, 2003. This means that all sale-lease back transactions not approved before that time will not be considered. At least 15 proposals submitted by state and local governments are currently pending before the Federal Transit Administration. These transactions have been stalled since last November.

Now that legislation has cleared the Senate, the focus now turns to the House where members seem more willing to work with stakeholders to provide for a transition period for pending proposals, and to at least consider maintaining sale-lease back financing but on a more limited basis. House Ways and Means Committee Chairman William Thomas (CA) has offered proposed legislation, H.R. 3967, that would allow pending sale-lease back proposals to move through the approval process. However, the bill includes many of the strict rules in the Senate proposal that would shut down the approval process for future proposals. But Representative Jim McCrery (LA), a member of the House Ways and Means Committee, is considering offering an amendment that would continue sale-lease back arrangements for American cities. Details of the proposals were not available at press time.

The House leadership is expected to try to pass its version of the comprehensive corporate tax bill, H.R. 2896, before the July 4 recess. This wont be easy since the House bill calls for $140 billion in tax cuts but only $80 billion is offset with revenue-raisers, which means $60 billion remains to be offset. Some Senate Republicans and most Democrats in both chambers are insisting that the House tax cuts be offset, while Republicans oppose adding many of the offsets in the Senate bill, including the leasing provision. Many House Republicans view the Senate bill as a huge tax increase, particularly on the leasing industry. Nevertheless, House Majority Whip Roy Blunt (MO) said May 19 GOP leaders believe they will be able to find enough votes to pass a corporate tax bill in the House by the beginning of July.