ELFA Supplements Earlier Economic Stimulus Recommendations to Obama Administration

Washington, DC , January 7, 2009: The Equipment Leasing and Finance Association (ELFA) supplemented earlier recommendations sent to the new Administration to stimulate the U.S. economy through enhanced investment in capital goods or real assets.

This set of recommendations was sent by ELFA President Kenneth E. Bentsen, Jr. to Dr. Lawrence Summers, Chair Designate of the National Economic Council and is supplemental to a November 2008 submission from the ELFA to the chair of the Obama-Biden Transition Project and to similar proposals offered by ELFA last November to the House and Senate tax writing committees.

First, in order to encourage purchase and investment in domestic manufactured capital goods, the ELFA proposes an Investment Tax Credit (ITC) at a 10% rate on a temporary basis for capital equipment.

Second, ELFA proposes the extension of renewable energy production tax credits (PTCs) and investment tax credits (ITCs) on a multi year basis for solar, wind, and geothermal energy property which would spur development and investment in these important technologies.

Third, as the incoming Administration considers health care components in its economic stimulus package , ELFA proposes to allow tax-exempt medical institutions access to cost effective financing sources for their high technology equipment needs.

As the incoming Administration considers economic stimulus policy proposals, the Equipment Leasing and Finance Association (ELFA) recommends consideration of the following which we believe would provide necessary stimulus to the U.S. economy through enhanced investment in capital goods or real assets. This letter supplements a November 2008 submission from the ELFA to Mr. John Podesta, Chair of the Obama-Biden Transition Project.

Investment Tax Credit Proposal

In order to encourage purchase and investment in domestic manufactured capital goods , the ELFA proposes an

Ø Investment Tax Credit (ITC) at a 10% rate on a temporary basis for capital equipment. Since the Kennedy Administration, the ITC has been periodically implemented by the Congress as a means of encouraging investment in productive assets. Purchasers of capital equipment would be entitled to an ITC and equipment lessors similarly would be entitled to the ITC as under prior law. The ITC would also be allowed against the Alternative Minimum Tax (similar to recently enacted renewable energy credits). Enactment of a temporary ITC would stimulate the acquisition of equipment and machinery by reducing the net cost of acquiring productive depreciable assets, which would in turn increase the after-tax rate of return on their acquisition. An ITC would also increase the cash flow available for investment, a result that would be particularly important to new and smaller businesses that have the greatest difficulty accessing the capital markets in the current environment. Acquiring businesses should be offered the acquisition options of purchasing or leasing, so that the provision of the tax credit will reduce the cost of capital through either lower tax liability or lower lease payments if the lessor uses the credit.

As you are aware, most if not all economists have revised downward their forecasts for business fixed investment (plant, equipment and software). The current economic situation of unstable capital markets lacking sufficient liquidity and slack aggregate demand has resulted in declining investment in capital assets as reported in third quarter GDP numbers. The ELFA reviewed seven recent reports and all but one expected a decline in 2008, with all expecting a decline in such investment in 2009 of anywhere from 2.3% to 13%. In 2007, U.S. private investment in equipment and software equaled $1.110 trillion according to the U.S. Department of Commerce.

Furthermore, the ELFA produces a monthly index of equipment leasing and finance activity of 25 banks, finance companies and finance subsidiaries of manufacturing companies (the "MLFI-25). After remaining relatively flat through the third quarter, new business volume shows a marked decline. Year- to-date through November indicates a drop in new business volume of 2.1% year-over-year ("YOY") with the 4th quarter down 20%. November posted a 33% drop in new business volume YOY, following a 9% drop YOY in October and a 2.4% YOY in September. MLFI- 25 companies report declining commercial demand along with increased underwriting standards as the culprit for the continued declines in new business volume. The percentage of participating companies reporting a decline in originations more than doubled in November as compared to October to nearly 70% indicating the decline is widespread as opposed to concentrated at a few company types or sectors.

Noted economists have suggested the implementation of a temporary ITC as an effective stimulative measure. Nobel Laureate Joseph Stiglitz recently wrote in an op-ed in the New York Times ( November 29 , 2008):

"[t]here are other elementary principles that help guide the design of a good stimulus. The government could, for instance, temporarily pay (though a tax credit) part of the cost of new private investment for companies that are spending more than, say, 80 percent of what they have spent annually in recent years on equipment like computers and machinery. This would be a high-powered, low- cost stimulus."

Indeed in an article coauthored with University of California Berkeley economist Brad DeLong, you have written extensively on capital investment as a means to enhance productivity. This essay published in the Financial Times (January 16, 2008) noted that while earlier experience in 2001 [expensing and bonus depreciation] was "not very encouraging a temporary investment tax credit or accelerated depreciation scheme might pull some investment forward from future years."

We agree with these statements and support a temporary ITC.

Renewable Energy Proposal

The extension of renewable energy production tax credits (PTCs) and investment tax credits (ITCs) on a multi year basis for solar, wind, and geothermal energy property would spur development and investment in these important technologies. In that regard, adding specific clarifying rules to the renewable energy investment tax credit (ITC) under IRC section 48 would enhance the stimulative impact of the proposal. Specifically, we would urge the following clarifications:

conform the renewable energy ITC rules to the special "sale leaseback" rules for bonus depreciation under IRC section 168 with respect to lessor syndication transactions;

allow the sale-leaseback rules to apply to " power- purchase agreements ," which are commonly characterized as "service contracts" (rather than "leases") under IRC section 7701(e);

Ø clarify that the ITC for solar equipment may be factored into the cash on cash and pre- tax return requirements otherwise applicable to leasing transactions (See Rev. Proc 2001-28);

Ø enact a legislative change to facilitate the leasing of solar panels to municipalities and other tax-exempt entities under Section 48.

Health Care Proposal

As you are aware, the incoming Administration has focused on including health care components in its economic stimulus package. One proposal that would fit logically within this health care package is a proposal that the Equipment Leasing and Finance Association has designed with Congressman Ron Kind to allow tax-exempt medical institutions access to cost effective financing sources for their high technology equipment needs.

Specifically, this proposal would address an anomaly from the JOBS Act of 2004 which prohibits a high technology equipment lessee from having a fixed price purchase option which is standard and customary in a lease of medical equipment. The inability to offer a fixed price purchase option harms non-profit hospitals and other tax-exempt medical institutions because the lessor is forced to charge higher rents to the lessee or to provide less flexible terms to tax-exempt medical institutions. This proposal would add high technology medical equipment to the current law exception for this special rule so as to allow tax- exempt medical institutions access to cost effective lease financing sources for their equipment.

We appreciate the opportunity to provide our ideas for economic stimulus and would be pleased to provide any additional information requested.

With kindest personal regards,

Sincerely,
Kenneth E. Bentsen, Jr.
President