September 28, 2023

Editor's Page


Change seems to bring more complexity instead of simplicity.

Mark R. Howard | 9/27/2018

It has been said that if we like laws and sausages, we shouldn’t watch how either is made. It has also been said that the previous observation is unfair to sausage-making, which, after all, follows a recipe and produces predictable, consistent results.

The major intent behind the Tax Cuts and Jobs Act of 2017 was to cut the corporate income tax rate, bringing the U.S. rate in line with those of other industrialized countries. That was an appropriate goal — whatever the law does in the short term to stimulate the economy, it will help make the U.S. more competitive globally in the long term.

Along the way, of course, the law had to be sweetened with all kinds of other provisions to build support. Its drafters also took a stab or two at “fairness” — apparently believing that a law that benefited corporations needed to ding them as well.

One fairness-related ingredient involved Section 118 of the tax code. That part of the law deals with money that passes from a government to a corporation as part of a public-private partnership. These partnerships — “P3s” — are agreements in which the government leverages its resources by contracting with a private company to build and operate a facility or project that performs a public function, in exchange for a series of payments over a long term.

The state of Florida has been a leader in using P3s for infrastructure projects. Some state colleges have partnered with private firms to build dorms, for example, with the developer financing and building the dorm and being repaid with the rents. One of the biggest P3s in Florida was the successful, billion-dollar revamp of I-595 in Broward County, which involved a partnership between the state and a Spanish construction company. The company financed and built the road improvements, which included an express lane in the median, and will be repaid with toll revenue. The project was accomplished 15 years faster and a lot cheaper than if the state had worked through its traditional process.

In recent years, the state has also used P3s to build water infrastructure, including reservoirs to store and clean water. In these deals, the state passes along funds to a landowner, who then builds out the infrastructure. The state then pays the landowner an annual fee — either a fixed sum or one calculated on how much water is cleaned and/or stored.

It’s a great approach: The state accomplishes its goals faster and cheaper because it doesn’t have to buy the land and then build the infrastructure itself. Landowners — including former citrus growers whose groves have been devastated by greening — can continue to use their land productively (the land stays on the tax rolls) and don’t have to sell it for development. The Legislature has approved at least a half-dozen of these “dispersed water projects.”

And now we’re back at Section 118.

Before the law changed, the P3 money that flowed from the state to a corporate landowner to pay for the infrastructure improvements wasn’t taxed. That’s appropriate because it’s not income — all the landowner gets is the capital required to build or modify the structures needed to store, instead of drain, the water. The annual fees, by contrast, are clearly income and are taxed as such.

But in their effort to be “fair,” the drafters of the Tax Cuts and Jobs Act revised Section 118 so that corporations now must pay tax on the money they receive for the capital improvements as well as the fees they receive later.

This was unwise for several reasons. First, it will force the government to increase the capital outlay to account for the tax the landowner must now pay. That, of course, raises the cost to taxpayers. Second, in making P3s more expensive, it’s inconsistent with the administration’s stated goals of using public-private partnerships to help meet the nation’s infrastructure needs.

“I think Congress was trying to balance the loss of revenue from other tax rate reductions and deductions, but everything happened so fast last fall they didn’t realize the unintended consequences of what they were doing with that kind of package,” says Michael Minton, a tax attorney with Dean Mead in Fort Pierce who represents several landowners affected by the law. “In one breath, they say tax the government’s portion of the contribution, then they say solve the problem with infrastructure with public-private partnerships. There’s certainly some kind of disconnect in those contradictory public policy positions,” Minton says.

Minton says there are legal work-arounds to avoid the problem created by the revisions to Section 118, but they’re not as clear-cut as the previous version of the law and could be challenged by the IRS. “We’d like things to be as black-andwhite as possible,” he says.

Minton’s comment highlights what may be the most vexing aspect of legislative sausage-making — change seems always to come in a convoluted way that adds complexity rather than simplifying matters.

Minton says he met with staff members from both the Ways and Means Committee of the U.S. House and the Senate Finance Committee who drafted and negotiated the law. They acknowledged the inconsistency between the tax act and the administration’s professed desire to use P3s to address the nation’s infrastructure needs — but they referred him to the White House for consideration of additional legislation to address the inconsistency.

Sausage, indeed.


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