WHEN THE NAVY Department decided recently to lease rather than buy 13 custom-tailored cargo ships, it was cashing in on a growing trend in government financing. Not only federal agencies, but local governments as well are finding that lease-back deals with private investors can make their budgets look considerably smaller. The catch is that the hidden costs show up as lost revenues to the federal Treasury, an addition to the deficit that Congress cannot now control.
Leasing routine services and equipment is a perfectly legitimate and efficient practice for government agencies in cases where the item in question is needed only sporadically or for short periods of time. The practice becomes suspect, however, when it is extended to such quintessentially governmental properties as naval ships, fire stations or city halls, and the transaction ends up costing the taxpayer more money than it saves.
Leasing is attractive to governments because they can pay for the things they need in installments rather than having to justify their full costs when they are initially bought. A municipality can thus avoid having to persuade voters to authorize a new bond issue, and a federal agency can avoid a fight with an authorization or appropriation committee.
The government can also lease the item in question at an apparently low price because the private investors, unlike the government, can claim substantial depreciation deductions against the taxes they would otherwise pay. Part of the true cost of the purchase is thus passed on to the federal Treasury in the form of lower revenues. The whole thing ends up costing the taxpayers more than a straight- out purchase because the investors and other intermediaries involved in the deal want some profit in return for their participation.
Rep. J. J. Pickle, chairman of the Ways and Means oversight subcommittee, has been looking into tax-leasing deals at all levels of government. He notes Joint Committee on Taxation estimates that the cargo ship-leasing deal will cost taxpayers 12 percent more than a direct purchase and disguise 30 percent of the true cost.
Similar hidden losses can be expected from other administration "privatization" schemes, such as the sale of weather satellites and the Clinch River Breeder reactor. Even larger taps on the Treasury can be expected as local governments extend their use of tax-leasing and other innovative forms of tax- exempt financing to shift both municipal and private development costs to the federal government. If Congress wants to narrow the federal deficit, it will have to stop what could become a massive and uncontrollable drain on federal revenue.