osewalrus (osewalrus) wrote,

Did Tax Shelters Contribute to Metro Crash?

My father, the tax lawyer, forwarded this to me from a list of tax academics. I must point out that it is unclear from this whether these leases have a buy out provision (that compensates the owner for the loss of the expected depreciation benefit). In which case it boils down to the same thing the Metro Authority has been saying all along, no money for upgrades. Mind, they should have included a straightforward abrogation of the lease obligation for safety, but that would have reduced the upfront purchase money price.

But the real lesson IMO is that requiring public services to act like the private sector and come up with "new revenue streams" has potential consequences. Here, the need to get the revenue from essentially selling a tax shelter impacted the ability to upgrade equipment.

DC Metro is in a tough spot because it involves three local jurisdictions and the Fed, all of whom think the other partners should pay more. And for MD and DC, only a modest portion of the state population benefit. By contrast, most other public transportation authorities are confined to a single jurisdiction, such as the state, where users can apply direct pressure as voters and/r business interests that benefit from public transportation.

How Tax Law Caused the Washington Metro Train Wreck

Sarah Lawsky (George Washington), The Washington Metro Crash and Tax:
[T]he National Transportation Safety Board repeatedly recommended that Metro
(more formally known as the Washington Metropolitan Area Transit Authority,
or WMATA) retrofit or replace these older cars, but Metro refused. Why?
Because ³WMATA is constrained by tax advantage leases, which require that
WMATA keep the 1000 Series cars in service at least until the end of 2014.²
What are these ³tax advantage leases²? They appear to be standard
sale-leaseback transactions, in which WMATA sold equipment, including train
cars, to another party and now leases it back. The other party gets various
tax advantages (depreciation, credits, and so forth) associated with owning
the equipment, and WMATA, which as a tax-exempt organization cannot use
these advantages, gets cash. But apparently the leases did not include
language that permits WMATA to break the leases if newer, safer equipment
comes along.
Thus sale-leasebacks, which are purely tax-motivated transactions, may have
locked Metro into using outdated and unsafe equipment and thus made this
crash even more deadly than it might otherwise have been.

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