HARDLY A DAY goes by without new tales of extraordinary financing schemes undertaken by governments and nontaxable institutions to attract private investment. The key ingredient? Heaps of tax breaks costly only to the federal treasury and contributors thereto.
All of these schemes operate in basically the same way. The non-taxable agency or organization arranges to have a private group buy or construct some big-ticket item. The nominal owners, being taxpayers, can claim one or more tax benefits such as accelerated depreciation, interest deductions and investment tax credits. The non-taxable organization then signs a long-term lease at a discount reflecting some share of the leaser's tax benefits. The leasers are happy because their tax bill has been reduced at no risk, and the agency is happy because its budget looks lower. But the federal Treasury pays a substantial part of the bill in lost revenue.
The idea is flourishing. That troublesome new NASA satellite just deployed by the space shuttle turns out not to be owned by NASA--at least not for tax purposes. The shuttle budget looks smaller than the true cost to taxpayers. Rural electric cooperatives assisted by the Rural Electrification Administration are getting into the game. The Clinch River Breeder Reactor may be sold and leased back. The Navy wants to "charter" customized cargo ships and the Air Force wants to lease 39 executive jets and assorted transports. Anyone want to buy a missile silo and rent space to the MX program?
State and local governments? Sale-lease-back deals are becoming the preferred method of financing many development projects. Atlanta, for example, is considering selling its historic city hall; private developers will renovate, enlarge, and lease it back to the city. The developers get the tax breaks, the city gets a deal on the rent, and Uncle Sam picks up a large part of the tab. Similar deals around the country involve museums, convention centers, schools and sewer systems.
The renovation of the Torpedo Factory in Old Town Alexandria is a state-of-the-art example. There, the private developers will take advantage of industrial development bonds, the investment tax credit, a special tax credit for rehabilitating old buildings, and accelerated depreciation. Bennington College is considering selling its campus to a group of friendly alumni, and leasing it back. The purchase price paid by the alumni becomes, in effect, a loan made inexpensive for the college because of tax breaks available to the alumni, at the federal Treasury's expense.
This is all absurd. Neither touristy torpedo factories nor college campuses should receive these extra helpings of invisible, unfocused taxpayer largess. And the issues of control and accountability become critical when the property involved is city hall or a Navy ship. This burgeoning tax avoidance industry is attributable in part to higher bond interest rates that make borrowing more expensive to local governments (there's too much state and local government debt floating around), and in part to the extremely attractive depreciation provisions in the 1981 tax act. Plugging this drain on the Treasury should be high on the agenda.