Tax Dodge Hurt Woodlake Dam
The Real Problem
- Robert M. Levy, columnist
- Oct 22, 2016
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Moore County narrowly averted disaster when the Woodlake (Lake Surf) dam almost failed.
Such catastrophic failures often kill hundreds living below the dam site. Most notable and similar was California’s St. Francis dam collapse in 1928, when 424 lost their lives.
The result of this near miss may force hundreds of homeowners to trade their lake for a creek. In real terms, that means that waterfront land could turn into land beside a wet ditch. The losses to homeowners and county tax rolls could run into the millions.
But it did not have to be. A truly conservative method of dealing with tax policy could have saved the dam.
In simple terms, without attempting to pen a politically incorrect pun, the dam needed a “sinking fund.” In fact, no infrastructure project, nor any building project, should be built without one.
When a dam or other infrastructure is built, it is assigned an anticipated lifetime. In the case of the Woodlake dam, its builders knew that it would not survive more than about 50 years.
Still, its original owner was allowed to build it, its subsequent owners were allowed to use it, and no one gave a thought to the real cost of it, except when the dam was used in a tax dodge called “depreciation.”
Interestingly, this depreciation game is the same game that allowed Donald Trump to show a billion-dollar business loss and avoid income taxes, possibly for decades. It is also the same tax game that nearly cost the lives of hundreds of residents living below the Woodlake dam.
When a company buys a machine or a dam, the company is allowed to depreciate it. This means that the company can reduce its taxable income each year until the income deducted covers the cost of replacing the item. In the case of Woodlake, if the dam cost $1 million and if it needed to be replaced or repaired in 20 years, then the owners of the dam could deduct about $50,000 from their income each year and pay no tax on that income.
All this is done supposedly to encourage new spending on equipment, machinery and dams. But only a “damned idiot” would believe it. It is just another tax dodge that makes the wealthy wealthier. The money does not go toward the purchase of more business equipment and structures. It becomes tax-free profit.
But, if the government required the creation of a sinking fund before a taxpayer could claim depreciation, there would be a source of funding to pay for repairs to the Woodlake dam and other out-of-date equipment.
A sinking fund is an account where depreciation is deposited. For instance, if the owners of the Woodlake dam wanted to take $50,000 off their taxable income each year, they would be required to deposit that $50,000 into a fund dedicated toward dam repair or replacement.
To their benefit, the owners would receive, possibly tax free, investment income from the sinking fund. To the public benefit, more equipment would be bought and more jobs would be created.
Requiring the use of sinking funds would also force the builders of any infrastructure, public or private, to consider the real cost of construction. It is not too dissimilar to the business model of car rental companies. The true cost of a car just begins when the car is purchased. Its true cost is only known when the cost of repair and replacement are “baked in the cake.”
The same is true of a dam or an auto factory robot. Without a sinking fund covering the real cost of depreciation, the tax code is nothing but a gift to shareholders. It is a rip-off of wage earners who must pay taxes without loopholes.
More important, the lack of a sinking fund for large infrastructure — not just dams, but underground pipelines, too — will cause innocents to die. It already has.
The 2010 failure to inspect and repair a northern California natural gas line installed in 1956 caused eight deaths and destroyed 38 homes. Even the recent East Coast gasoline pipeline break that cost millions in elevated fuel prices was caused by lack of a sinking fund.
Woodlake dam teaches that tax policy is not just the boring stuff between election sex scandals. It is policy that can kill.
Contact Robert M. Levy at .