THE WAYS AND MEANS Committee moved into closed session this week to mark up a bill curbing tax-motivated lease-back arrangements by local governments and other tax-exempt entities. The unusual retreat into privacy may be taken as a good measure of the intensity of the lobbying effort mounted by the various interests that have exploited this Treasury-raiding technique since the 1981 tax law made such deals both easier and more profitable.
Despite this lobbying, the committee reported a bill that would put a halt to future leasing arrangements that are prompted not by economic considerations but by the desire of tax-exempt entities to share in the federal tax breaks provided to taxable investors. The bill provides overly generous treatment for deals already partially in progress, but the committee's action is an important step toward closing a loophole that is projected to cost the Treasury at least $14 billion over the next five years --and possibly much more, since investment promoters have begun marketing the deals nationwide..
Lease-backs are being used by local governments to finance jails, stadiums and public buildings, and by the Pentagon to disguise a substantial part of the cost of buying cargo ships and jets. Even foreign governments are benefiting by getting favorable terms on equipment--some of it foreign-made-- leased from U.S. investor groups. These many beneficiaries have stoutly defended the practice by pointing to the worthiness of their activities. Surely Congress doesn't mean to discourage investment by states and cities when, as everyone knows, what is known as the very infrastructure is crumbling under their feet. And who would want to discourage exports to foreign countries or impede the Pentagon in rebuilding the nation's defenses?
The trouble with these arguments is that they don't address the central point. It is that the federal tax code is not meant to be a vehicle for exerting disguised influence on the decisions of other governments. Ideally it would be neutral with respect to the investment decisions of private investors as well, although it has strayed far from that laudable objective. But at least in the case of taxable investors, subsidies can be theoretically justified by the possibility that they will ultimately be recouped in future taxes. In the case of governments and nonprofit agencies, the federal government has already given them the ultimate tax benefit--no taxes at all.
The notion that tax-leasing somehow supports the administration's goal of "privatizing" the public sector is simple nonsense. Tax-motivated lease- backs produce no new efficiency--in fact, they inflate total costs by removing procurement decisions from public scrutiny and by siphoning off profits to intermediaries. Congress already provides substantial direct subsidies to states, localities, nonprofit organizations and exporting corporations. It should not allow these entities to help themselves to additional subsidies through the Treasury's back door.