NCPA - National Center for Policy Analysis

Tax Sheltered City Leases

April 2, 2004

Since 2001, 16 U.S. companies have bought public transportation assets from cities through 35 leasing agreements that allow the buyer to save millions of dollars on taxes as the assets depreciate, even though they don't operate the equipment. Washington lawmakers say that this growing practice is an abuse of tax law and that is costs the federal government revenue.

Opponents of these leasing arrangements say that cash-strapped cities are not enjoying much benefit, with the disproportionate gains going to private companies. The U.S. Department of Transportation has since delayed some 15 leasing transactions worth $3.1 billion.

The Bush Administration says the tax shelter will cost the federal government $33.5 billion during the next 10 years. Records on the previous 35 dealings, which involved $9.5 billion worth of publicly funded transportation assets, show that:

  • In part, due to these public transit lease agreements, Wachovia paid no taxes on $3.6 billion profit in 2002 and received a $159 million tax refund.
  • The states will lose an estimated $6 billion in tax revenue because of the shelters.
  • Overall, the agreements resulted in almost 600 percent return on investment in taxes saved for the biggest investors.

The companies blame the convoluted tax system for creating incentives to shelter profits from taxation that would not exist under a simplier system. Says a Bank of America spokeswoman, the company "followed the letter of the law, and if the government changes the law, we will act accordingly."

Further, defenders of the tax shelters say that Department of Transportation actually encouraged transit authorities to pursue the contracts as a creative way to secure capital. In fact, the Federal Transit Administration even published a guide for wining approval of the agreements on its web site.

Source: Ryan J. Donmoyer, "Tax Break Draws Scrutiny in D.C.," Fort Worth, March 10, 2004.


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