Safe-Harbor Leasing: Separating the Wheat from the Chaff

In August 1981 the U.S. Congress enacted the Economic Recovery Tax Act (ERT A) to stimulate investment in plants and equipment through expanded investment tax credits and a more rapid method of depreciation. Before this legislation, firms that did not generate sufficient taxable income could not take full advantage of tax incentives for investment. Consequently, these firms faced an effective cost of capital some 10 percent to 30 percent higher than their more profitable counterparts. The 1981 tax-law revisions allowed low-profit or profitless firms to sell their tax benefits to more profitable firms. The intent of these new rules, called the safe-harbor leasing provisions, was to equalize the cost of capital for all firms, that is, to allow a more even distribution of tax incentives for investment under the U.S. corporate-income-tax code.