Retroactive tax fix alarms financial-services lobby

A retroactive tax change that the Senate Finance Committee passed Tuesday as part of an energy tax package has provoked a backlash from financial-services lobbyists, who warn it could have a chilling effect on investment.

The provision would take away the tax advantages of any foreign “sale-in, lease-out” (SILO) transaction before March 12, 2004. It follows corporate tax legislation in 2004 that trimmed the tax benefits of future SILO transactions.

{mosads}“It’s one thing if years later Congress changes the tax prospectively. But to do it on a retroactive basis would really give our members pause in making investment decisions,” said David Fenig, senior vice president for government relations at the Equipment Leasing and Finance Association.

“This undermines the stability and predictability of the tax code,” argued Scott Talbott, the Financial Services Roundtable’s senior vice president for government relations.

SILO transactions became popular in the banking and leasing industries about a decade ago. To capture tax breaks, a U.S. bank or financial firm becomes the owner of a transit system or other piece of infrastructure and then leases it back to the municipality, writing off the losses as a depreciation expense.

As revenue raisers go, the provision is potent. It would affect only about 15 to 20 financial firms, but it would raise $4.1 billion over 10 years by disallowing the deduction of losses from existing SILO deals with foreign entities.

Lobbyists were caught off-guard by the change, even though the provision passed the full Senate earlier this year as an offset to the tax relief attached to the minimum wage bill. In committee on Tuesday, it was tacked onto an amendment sponsored by Sen. Ron Wyden (D-Ore.) to reauthorize a program for rural schools, passing on a voice vote.

“This was sprung on us. We didn’t find out until half an hour beforehand,” one lobbyist said.

Finance ranking member Sen. Chuck Grassley (R-Iowa) regards such transactions as tax shams and has pushed legislation to repeal the tax advantages of current SILO deals ever since the 2004 bill.

His opposition has confounded the business community, which is not accustomed to locking horns with a GOP foe on a tax issue.

“To have a Republican retroactively change the law to hurt financial-services firms is unprecedented and dangerous,” one lobbyist said.

Although many lobbyists suspected Grassley had pulled strings to attach the provision to the energy tax package, Wyden said he supports the change as a matter of policy.

“Letting companies get a tax break by buying and leasing back foreign sewer systems just doesn’t pass the smell test,” he said. “Congress has already shut down many of these abusive deals and it’s time to fully close this loophole.”  

The provision passed the Senate more than once in the last Congress but consistently encountered steep opposition from House Republicans. Earlier this year, Jim DeMint (S.C.), Elizabeth Dole (N.C.) and six other Republican senators sent a letter to Finance Committee Chairman Max Baucus (D-Mont.) and Grassley urging them not to attach the offset to the minimum wage bill.

Rep. Charles Rangel (D-N.Y.), the chairman of the Ways and Means Committee, delighted the business community when he also stated his opposition to the measure. He called a hearing in March in which lobbyists blasted the revenue offsets that the Senate Finance Committee had attached to the minimum wage legislation, including the SILO provision.

“Virtually everyone, from [House Ways and Means ranking member] Jim McCrery (R-La.) to Charlie Rangel, have recognized [that retroactivity is] … bad tax policy,” one lobbyist said. “It’s quite astonishing that Grassley hasn’t realized this.”

But a Senate Finance Committee staffer argued that Grassley’s stance on SILOs is not retroactive. “It targets future tax benefits from these widely abusive deals,” the aide said.

Asked for comment, a Ways and Means Committee spokesman said only that members “look forward to addressing differences” between the House and Senate tax packages in conference. The House tax-writing committee marked up its energy tax package yesterday.

Several lobbyists predicted that House lawmakers will knock out the measure again. “I fully expect that Chairman Rangel and the ranking member will lock arms and say, ‘This is not acceptable,’” said Ken Kies, a tax lobbyist.

But in that case, many believe the provision will reappear in other legislation. According to one lobbyist, once an offset has been scored and vetted, “it’s just sitting on the shelf waiting to be taken off again until it’s passed into law.”