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Legislation Eliminating Sale-Lease Back Financing Moving

By Larry Jones
April 12, 2004

For the second time in the last two weeks, the Senate rejected a motion to cutoff debate on S. 1637, the Jumpstart Our Business Growth Act, a comprehensive tax bill that includes a provision that would shut down sale-lease back financing. The Senate voted 50 to 47 mostly along party lines on April 7, which was 10 votes short of the 60 needed to end debate.

Democrats have refused to end debate on the measure to force Republican leaders to allow votes on an unlimited number of amendments. Following the vote on the motion to invoke closure, Senate Majority Leader Bill Frist (TN) and Senate Minority Leader Tom Daschle (S.D.) met for several hours behind closed doors and later reported that they had made significant progress in negotiating an end to the partisan dispute that has blocked action. A press time, the two leaders were hoping to agree by April 8 on the number of amendments that will be offered. However, no additional floor action is expected on the bill until the week of April 19 after members return from the Easter recess.

The Conference of Mayors opposes the leasing provision because it will cause cities and other tax-exempt entities to lose an estimated $5.4 billion over the next ten years according to the Joint Committee on Taxation and because it will drive up cost of traditional leasing of equipment and property such as cars, trucks, copy machines and computers. In a March 17 alert, Conference Executive Director Tom Cochran urged mayors to contact their senators and urge them to oppose the provision.

The main purpose behind the comprehensive tax bill is to provide tax cuts to manufacturers to stimulate job growth, and repeal an export tax regime that was ruled illegal in 2002 by the World Trade Organization. Starting in March, a European Union tariff was imposed on $4 billion worth of U.S. exports and the penalty will continue to increase until Congress repeals the export tax regime. While there is wide support for providing a tax break to manufacturers and repealing the export tax regime, Democratic leaders have insisted on offering a number of unrelated amendments that Republican leaders have refused schedule for a vote. These including a minimum wage increase, an extension of unemployment benefits and blocking the enforcement of a Labor Department overtime pay regulation that will disqualify certain workers for overtime.

Last November the Federal Transit Administration suspended the approval of sale-lease back transactions, which left a number of state and local governments with proposal pending in the approval process. Provisions in the proposed legislation would impose strict limits on tax deductions for investors who engage in these transactions with cities and other tax-exempt entities. The limitations would have a retroactive effective date of November 18, 2003. However, modifications were made in the latest version of the bill that would provide a 2005 effective date for sale-lease back transactions involving foreign-use property.

A number of local governments have used these transactions to help finance transportation infrastructure expansion and improvement projects. Under this arrangement, an investor such as a bank enters a long term arrangement to acquire city property such as a subway line. The investor pays the city a significant amount up front which can be used to help expand or improve the subway line. The investor then leases the property back to the city and is allowed to depreciate it and receive a federal tax deduction over the term of the lease.