Van Slyke weighs in on tax law changes, PPPs in Bloomberg article
Reproduced with permission
from Daily Tax Report, 42 DTR 4 (March 2, 2018). Copyright 2018 by
The Bureau of National Affairs, Inc. (800-372-1033) <http://www.bna.com>
Tax Law Could Impede Another Trump Goal: Infrastructure
• Law limits tax breaks for
• To get tax benefit, projects
must be subject to existing comprehensive plan
By Laura Davison
A last-minute wording change in the new tax law may
limit the number of infrastructure public-private
partnerships, one of the vehicles President Donald Trump has touted to finance
his plan to revive roads, bridges, and airports.
The 2017 tax act limits the tax breaks for payments
from government entities to private companies unless the monetary exchanges are
tied to a “master development plan,” a term that isn’t defined in tax code
The change could have the effect of limiting a host
of undertakings—toll roads, real estate development, and environmental
projects—that don’t meet the new standard.
Payments pursuant to master development plans are
excluded from gross income, meaning the Internal Revenue Service’s
determination about what is—or isn’t—such a plan could affect the economics of
projects already in progress.
The new law also requires the master development
plan to have been approved prior to the law’s enactment. Thus tax breaks for
public-private partnerships won’t be available for projects that have yet to be
fully planned. So the new airport that’s been in the works for some time could
be safe, but the drainage system for a river that changes course in the future
could be out of luck.
The new law puts a lot of pressure on how a master
development plan is ultimately defined, Jason Washington, executive director at
the National Council for Public-Private Partnerships, told Bloomberg Tax.
“Many public entities have development plans that
are basically all the projects they would like to do over the next 10-15 years,
but it’s not clear that those have enough specificity they’re requiring,” he
The Trump administration has proposed using $200
billion in federal money to leverage an additional $800 billion from the
private sector through public-private partnerships. The plan has been
criticized for relying too heavily on private dollars, and the profitability of
such ventures will need to be further examined in light of the new tax law.
However, the tax law change could temper the cost of the $200 billion Trump has
proposed to spend if a portion of that could be recaptured as tax revenue the
recipients pay on those contributions.
Development agreements should have all the
substantive terms of the deal, including the procedures for property
acquisitions and easements; who is responsible for building what, and when and
how the construction is paid for; responsibilities for complying with building
standards and laws; project costs and reimbursement plans; timetables; and
breach of contract provisions, according to a list of best practices from the
Urban Land Institute.
The tax law changes are causing confusion among
existing public-private partnership arrangements and prompting entities to look
at possible ways to restructure deals that don’t comply with the new tax law,
Brad Gould, a shareholder at Dean Mead in Fort Pierce, Fla., said.
“You can’t assume if you are getting money from
government that it will be covered” by Section 118, Gould said.
Instead of capital contributions, which could now be
taxable if they don’t meet the requirements of Section 118, companies could
look to restructure the projects so that the public entity takes on more of the
responsibility and owns the equipment, and the private partner just leases the
land where the project is taking place, he said. Another option is for the
government to use other tax incentives—such as steep property tax discounts—to
woo potential partners.
Discussions between public and private entities will
ultimately come down to how profitable a deal is in light of the changes, David
M. Van Slyke, dean of the Maxwell School of Citizenship and Public Affairs at
Syracuse University, said.
“The real question is how profitable is profitable
enough,” he said. Returns for the private partner typically fall between 8
percent and 12 percent, so if deals can meet that threshold they can usually
get done, Van Slyke said.
Ultimately, the requirement for master development
plans will probably lead to better-managed projects, Van Slyke said. These
plans require due diligence to be done upfront, which leads to better outcomes.
Maryland and Virginia, for example, have shown an aptitude for managing
projects, particularly those where multiple levels of government are involved.
In other states, such as Florida and Texas, results are more mixed, he said.
The law change could “limit the initial rush to get
it started on some projects,” Van Slyke said. “But this should also facilitate
more successful partnerships.”
By Laura Davison
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