I originally intended to write about President Obama's DOJ Tax Division nomination. But this week brings the tragedy of Washington's Metro crash, and unexpectedly (at least in my mind) an assault on Tax Law as one of the "but for" causes. An argument even Mrs. Palsgraf would not make.
The premise, articulated by Professor Sarah Lawsky, suggests a connection between tax-advantaged sale-leaseback transactions WMATA entered into for rail-cars and Monday's crash. At the outset, I have no real issue with exploring the idea and kicking it around the academic water cooler. These are the kinds of topics I expect professors and policy think-tanks to explore, and which I enjoy reading and thinking about myself. Unfortunately, the idea seems to have generated a life of its own, and in my mind is being twisted.
Sen. Grassley has latched on to the suggested connection between sale-leasebacks and the crash. The tragedy is not yet five days old, causes of the crash are unknown, and already members of Congress are drafting a spending bill using some of their favorite rhetoric, tax-shelters and banks. (here).
So allow me to untwist this. Tax law did not cause nor contribute to Monday's crash. Even if it turns out that old rail-cars were solely the cause of Monday's crash, tax law still has nothing to do with it. There, I said it. My short life as tax blogger may be over . . . but my wife will still read my posts.
If equipment is kept beyond its useful life the tendency to break down increases. Here, there were no tax incentives for WMATA to keep the rail-cars in service beyond their useful life (in fact, most tax law provides an incentive to get rid of old equipment and buy new equipment, e.g. section 179). There were financial pressures for keeping the rail-cars, WMATA had no money. WMATA could break their lease, but they made a financial decision not to break their lease and keep the rail-cars in service. Their decision did not consider the tax consequences; and why would it, they are tax-exempt. In hindsight, a financial decision put before safety - maybe, we do not even the cause of the crash. But make no mistake, they were not tax-induced into keeping old rail-cars.
Did the counter-party to the sales-leaseback benefit? Sure. But so do thousands of other Americans when we buy tax-favored municipal bonds. If WMATA had kept the cars in service because they didn't have the credit rating to float additional bonds for new rail-cars, would we blame municipal bonds as well? I do not think so.
Does WMATA need money? You bet. Will Congress give it to them? You bet. But let's be clear, tax laws are not the reason WMATA needs new rail cars. Tax law did not cause nor contribute to Monday's crash.