Originally created 01/15/04

Treasury wants to stop lease arrangements used for tax breaks



WASHINGTON -- The Treasury Department on Tuesday asked Congress to stop the widespread leasing of public water systems, subways and bridges to private companies in arrangements that infuse cash into local governments and hand tax breaks to private investors.

Left unchecked, the Treasury Department said, the lease arrangements could drain nearly $34 billion from the U.S. Treasury over a decade.

"We think it's been pretty widespread," said Assistant Treasury Secretary Pamela Olson.

The administration wants the prohibition to take effect retroactively on Jan. 1, 2004, which would leave previous transactions intact. However, Olson noted that the government is reviewing older leases.

"The IRS is auditing in this area," she said.

In a typical leasing agreement, a local government leases infrastructure built or bought with public funds to a private company to raise revenue. The private company claims a tax break for the depreciated value of the infrastructure. The local government retains control of the infrastructure.

Olson said there is little businesses substance to the leases. "There is little to be said in support of these transactions," she said.

The leasing deals drew attention last fall when an anonymous witness told a congressional committee that state and local governments had turned to the arrangements when faced with steep budget deficits. The witness testified that the public transit systems of Boston, Chicago and Washington had been leased to private companies.

Officials in the three cities confirmed they use the leasing agreements and described them as a revenue boon for transit agencies, which had been approved by the Federal Transit Administration

Since then, the Federal Transit Administration has suspended its review of fifteen pending transactions worth up to $250 million to municipalities, according to the American Public Transportation Association.

"We think it is fundamentally unfair, if not arbitrary, for the FTA to suspend its review of the fifteen or so pending transactions that are no different from the many transactions the FTA has reviewed and approved in the past," President William W. Millar wrote to Transportation Secretary Norman Mineta in December.

Michael Fleming, president of the Equipment Leasing Association, said declarations in Congress to bring an end to the practice have brought many pending agreements to a standstill without consideration of alternative sources of financing for hospitals, cities, schools and fire departments.

"They are the ones that are really going to be the losers in this," he said.

He also challenged critics who called the arrangements abusive tax shelters. "There is absolutely no abuse," he said. "They are done according to a long history of law."

Critics in the administration and Congress say taxpayers lose more from the deductions claimed by private corporations than they gain from improvements to public works.

The Senate Finance Committee started work last year on legislation to block the lease deals.

"I'm especially glad to see administration support of my efforts to shut down abusive leasing transactions that allow corporations to claim tax deductions for subways, water mains and other infrastructure built with taxpayer dollars," said Sen. Charles Grassley, R-Iowa and chairman of the committee.

The proposal to prohibit the leasing deals is the largest in a list of initiatives to close down tax shelters and increase penalties for those who sell and use abusive transactions. The items will be formally proposed in the president's budget submitted to Congress in February.

In the budget, the administration plans to call for a 4.8 percent budget increase for the IRS, including $300 million boost for the division that enforces tax laws and unearths tax shelters.