P3 Backers Urge Easing of Tax-Exempt Bond Rules on Asset Leases

Why It Matters

Removing the defeasance constraint would lower borrowing costs for state and local governments and make long‑term lease structures financially viable, accelerating infrastructure renewal. The change could dramatically expand private‑sector participation in a market that has lagged behind global peers.

Key Takeaways

• IRS defeasance rule forces bond retirement on asset leases
• Removing rule could cut financing costs for state infrastructure projects
• Asset recycling remains rare due to current tax‑exempt bond constraints
• IFM and DOT endorse amendment to attract private capital
• P3 advocates argue change would expand U.S. infrastructure pipeline

Pulse Analysis

The IRS’s defeasance provision, enacted in the 1986 tax code, was designed for a era when public entities issued tax‑exempt bonds without anticipating private operators. Today, that rule obliges governments to retire those bonds whenever a long‑term lease transfers operational control, creating a sizable upfront cash outlay. By contrast, modern financing tools such as TIFIA, WIFIA, and private‑activity bonds aim to lower barriers for private participation, yet the defeasance clause remains a stubborn outlier that skews cost‑benefit calculations for many projects.

Asset recycling—selling or leasing existing public assets and reinvesting proceeds into new infrastructure—has been limited in the United States largely because the defeasance rule adds a financial penalty. The Indiana Toll Road lease, a $3.8 billion, 75‑year transaction, illustrates the potential upside when the barrier is overcome. Removing the requirement would allow municipalities to keep tax‑exempt bonds outstanding, preserving low‑interest financing while unlocking upfront capital for new ventures. This could spur a wave of similar deals, from transit corridors to water treatment facilities, expanding the pool of investable projects without raising taxes.

Stakeholders across the spectrum are aligning on the need for reform. IFM Investors’ recent analysis highlights the rule’s “significant upfront cost” and predicts that regulatory clarification would broaden the pipeline of private‑capital‑backed infrastructure. The U.S. Department of Transportation’s endorsement adds federal weight, signaling that policymakers recognize the competitive disadvantage the rule creates relative to other nations. If the IRS revises the regulation, the United States could see a more vibrant P3 market, faster project delivery, and a more efficient allocation of public resources, ultimately strengthening the nation’s infrastructure resilience.