The Navy has begun leasing rather than buying some of its ships in deals that lower the apparent price of the vessels while giving large tax breaks to the private companies involved.
The Air Force is considering following suit and leasing, instead of buying, 124 "executive-style" jets to replace aging T39A Sabreliners.
The Pentagon routinely leases large amounts of real estate and equipment, but rarely items as large and central to its mission as new ships and planes.
The lease arrangements shift part of the cost of the ships and planes out of the Pentagon budget; instead these costs show up as lost tax revenues. In addition, the mechanisms reduce early budget costs by pushing many of the payments far into the future in contracts running 20 or more years.
The Navy has entered into lease agreements with three firms--General Dynamics Corp., Waterman Steamship Corp. and Maersk Line Ltd.--for acquisition of 13 ships to be used as "floating warehouses" in the Indian Ocean.
These ships would be used to store arms and equipment for the Rapid Deployment Force under 25-year contracts reaching an estimated cost of $201.2 million a year by fiscal year 1987.
In addition, the Navy is exploring acquisition of 24 "adversary aircraft" from General Dynamics or Northrop Corp. through leases. The terms would have to be negotiated but the cost of each plane would be about $10 million.
While not identical, the Pentagon leases work in much the same way as the controversial corporate tax leases that were permitted under the 1981 tax cut bill. In effect these let corporations buy and sell tax breaks. The leasing provision was repealed last year after disclosures that highly profitable firms were using it to cut drastically or eliminate tax liabilities to the government.
Under lease deals, as opposed to direct purchases by the government, private companies are allowed to use the tax breaks that result from investments in equipment--the 10 percent investment tax credit and the highly beneficial depreciation deductions permitted under the 1981 bill.
In effect these companies then share their tax savings with the Pentagon through lower prices.
Navy officials contend that the lease agreements result in a reduction of the cost of acquiring the ships. Studies prepared for the Navy purport to show that savings through leases, including calculations of the lost tax revenues, make them more advantageous than direct purchases.
These findings are disputed by a senior member of the House Ways and Means Committee, Rep. J.J. (Jake) Pickle (D-Tex.), whose assessment is supported by a number of tax analysts.
Using an analysis of the 13-ship lease proposal prepared for the Navy by the Argent Group Ltd., it would cost the Navy $184 million for each ship if it were purchased.
Under a lease, the cost to the Navy would be $141 million in "rental" payments. In addition, the accounting firm calculated that the total taxes lost over the life of the lease would be $131 million for each ship. But the net tax loss would be less than this because the firm doing the leasing would have to pay taxes totaling $114.6 million on the rental and interest income. The net of all these factors, according to the Navy study, is a savings of nearly $27 million per ship.
Pickle's staff and other experts, however, sharply disputed the analysis, contending that it grossly overestimates the taxes that will be paid by the private companies, noting the study estimates taxes of over $100 million on interest payments, when in most cases the interest is paid to a bank. Banks, in turn, most often have effective tax rates of 10 percent or less and consequently would pay nothing approaching the $100 million in taxes.
Aides working with Pickle calculated that the leasing system would end up costing 15 to 20 percent more than direct purchases.