The Washington Metro Crash and Tax

Taxes raise revenue, of course, but they also induce behavior.  Sometimes these behavioral responses are intended by lawmakers (for example, when lawmakers raise taxes on an activity they deem undesirable, such as smoking), but often they are not.

The deadliness of yesterday’s Metro crash in Washington, DC, my hometown and current location, may be, at least in part, one of these unintended consequences.

As you have doubtless seen elsewhere, two Metro trains collided when one train ran into the back of a stopped train, killing at least nine and injuring over 75 others.  The first car of the moving train was, the Washington City Paper reports, the oldest type of Metro car in the system, a 1000-series Rohr car.

The City Paper reports that the 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 “WMATA is constrained by tax advantage leases, which require that WMATA keep the 1000 Series cars in service at least until the end of 2014.”

What are these “tax advantage leases”? 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Thus sale-leasebacks, which are purely tax-motivated transactions, may have locked Metro into using outdated and unsafe equipment and thus made this crash even more deadly than it might otherwise have been.

(I have not seen the documentation for these transactions, so I’m only guessing about the details based on some articles and documents I was able to locate on the web, and I’m not an expert in the area of sale-leasebacks, which raise many tax issues, so if others have any insight into this transaction in particular or sale-leasebacks in general, comments, corrections, and clarifications would be most welcome.)

(Edit: This is the first post in a series. One, two, three, four, five.)

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11 Responses

  1. “Thus sale-leasebacks, which are purely tax-motivated transactions,…”

    I blame the Bush tax cuts…but as you noted earlier, this isn’t a purely tax-motivated deal; WMATA would have received cash…

  2. Sarah Lawsky says:

    What I meant by saying it was “entirely tax-motivated” was that WMATA got the cash only because they were selling tax assets (deductions, credits). Put another way, without the tax code, this sale/leaseback would probably never have happened–generally these sorts of transactions do not have a separate business purpose.

  3. Lawrence Cunningham says:

    Important post and implications. Thanks for this.

  4. Bobo says:

    All the software for Metro was outsourced to Indian IT firms who took it over in August 2008. If the hardware was dangerous, then why no crash previously? How come the crash happened right after Indian, Inc. took the software over. Answer: India, Inc. is incompetent and screwed the software up, just like they did at ComAir and caused the 12/25/05 nationwide airport system shutdown when their software couldn’t handle a peak load. Do the research – the facts are in plain view.

    India, Inc. is now also designing and working on our air traffic control software. Do you feel safe flying? Expect planes to start dropping out of the sky.

  5. “Put another way, without the tax code, this sale/leaseback would probably never have happened–generally these sorts of transactions do not have a separate business purpose.”

    possibly but I still don’t see the relevance. The tax deductions go into the pricing – without them, WMATA would either have to pay a higer leasing fee or end up keeping the cars on their own books. If WMATA couldn’t afford to pay an early lease termination fee (assuming they wanted to) why does anyone think they could have replaced all these-apparently-still-adequately-operating cars.

  6. Sarah Lawsky says:

    Maryland Conservatarian–

    I think I wasn’t clear about exactly what the transactions are–I will put up a post later today explaining it better. WMATA wouldn’t have paid any leasing fee at all, because they would not have been leasing the cars.

    I also take you to be making a second point, which is very interesting and also worth a separate post: that this tax-motivated transaction provided Metro with funding it desperately needed, so that the cars would not have been replaced even without the “tax advantage lease.” That may well be. The only reason I am focused on what the leases were and how they prevented WMATA from getting rid of the cars is that WMATA itself said that the reason they could not get rid of the cars was the leases. But the funding issue is really interesting, and in a future post I will talk about how Metro is funded–e.g., how the FTA was pushing these sale-leasebacks (which the IRS later disallowed).