WASHINGTON — Eliminating the tax exemption for new qualified private-activity bonds beginning in 2014 would increase federal revenues by $31 billion through 2023, the Congressional Budget Office said in a report released Wednesday.
The 316-page report, “Options for Reducing the Deficit: 2014-2023,” presents 103 options for decreasing federal spending or increasing federal revenues over the next decade to reduce the federal deficit.
The report also said more than $1 billion in revenues could be raised by eliminating airport improvement program grants to large and medium-sized airports. AIP grants typically are used to finance the expansion of runways or to improve safety and security.
PABs are used to finance projects that are used and partly paid for by private parties. The bonds are tax-exempt if they fall into a “qualified” category of projects such as airports, single and multi-family housing, water furnishing facilities, sewerage facilities, and hospitals.
The $31 billion increase in revenues that would come from eliminating the tax exemption for new PABs was estimated by the Joint Committee on Taxation, according to the report.
“One rationale for this option ... is that [it] would improve economic efficiency in some cases,” the CBO said. “For example, the owners of some of the infrastructure facilities that benefit from the tax exemption can capture — through fees and other charges — much of the value of the services they provide. Therefore, such investments probably would take place without a subsidy.”
“Another argument in favor of this option is that it would encourage nonprofit organizations to be more selective when choosing projects and, in general, to operate more efficiently,” the CBO said in the report.
The CBO pointed out that nonprofits do not pay federal income tax on their investment income yet use tax-exempt debt to finance projects they could otherwise fund by selling their own assets.
“By holding onto those assets they can earn an untaxed return that is higher than the interest they pay on their tax-exempt debt,” the CBO said. “Eliminating the tax exemption for debt-financed projects of nonprofit organizations would put those projects on an even footing with projects financed by selling assets” and “encourage [nonprofits] to operate more cost-effectively.”
The CBO conceded, however, that “some nonprofits with small asset bases, or endowments, could be forced to cut back or even case operations.”
On the other hand, implementing this option would mean “that some projects that would not be undertaken without a tax exemption would provide sufficient public benefits to warrant a subsidy,” the CBO said.
Supporters of qualified PABs claim eliminating the tax exemption would remove an important source of funding for them. This concern is especially acute now because state and local finances have been weakened by the financial crisis and slow recovery, the CBO said.
Because of these concerns, the implementation of this option “could be delayed a few years until the economy is expanding more strongly,” budget office said.
After describing the pros and cons, the report says, “If lawmakers wished to continue to support infrastructure investment and other projects undertaken by the private sector, they could do so more efficiently by subsidizing them directly rather than by subsidizing them through the tax system.”
Lawmakers could provide direct subsidies to projects by guaranteeing loans or making loans available to the private sector at below-market rates of interest, the report said.
Tax-exempt financing is inefficient for two reasons, the CBO said. First, the reduction in borrowing costs for issuers of tax-exempt PABs is less than the federal revenues foregone through the tax exemption, it said. Second, the amount of subsidy delivered is determined by the tax code and does not vary across projects according to federal priorities, the budget office said.
