The Council of Development Finance Agencies submitted a 14-page legislative package to a House Ways and Means tax reform working group, detailing the need for tax law changes that it said would “modernize and revolutionize” qualified small issue manufacturing bonds.
These tax-exempt, private activity bonds, formerly called industrial development bonds, are used to finance small to mid-sized manufacturing projects, CDFA said, calling them “a key economic development tool for state and local economic development agencies.”
Since 2001, nearly 5.7 million manufacturing jobs have disappeared, CDFA president and chief executive officer Toby Rittner told the working group, proposing eight tax code reforms that he said “will expand the capacity and usability of manufacturing bonds to help create American jobs immediately.”
Rittner noted that the tax law for manufacturing bonds have not been reformed in nearly 30 years and said it has contributed to a decline in bond issuance. Over $3.1 billion in manufacturing bonds were issued in 2007 compared to $666 million in 2010.
“The drop in manufacturing bond issuance is directly related to the outdated rules and regulations that govern these bonds,” Rittner said. “Improved tax policy will enable manufacturers to access bond financing again.”
CDFA recommended eight reforms, which together would make up The American Manufacturing Bond Finance Act. CDFA floated the legislation last June, but did not find any sponsors. This package details the need for each of the reforms and suggests legislative language.
One reform would expand the definition of “manufacturing” to include intangible as well as tangible production, to account for the fact that “today’s manufacturers encompass more modern, high tech, and intangible manufacturing practices such as bio-technology, energy generation, food processing and software,” CDFA said. Current federal law defines a “manufacturing facility” as one that produces tangible property.
Another reform would increase to increase to $30 million from $10 million the size limit for qualified small issue manufacturing bonds.
CDFA is also recommending increasing to $40 million from $20 million the capital expenditure limit for these bonds.
The group is proposing that Congress raise the limits for bank deductibility to $30 million from $10 million so that banks can deduct 80% of the cost of buying and carrying tax-exempt bonds sold by issuers that have issued up to $30 million of bonds in a year.
Another proposed reform would allow the unused capacity for these bonds under state volume caps to be carried forward for up to three years, as is the case for other private activity bonds. Currently there is not carry forward provision for these bonds.
CDFA also wants Congress to eliminate the restrictions on “fundamentally related and subordinate facilities” for these bonds, as well as the restriction on the use of accelerated depreciation by manufacturers using these bonds.
The group also wants to expand the 2% de minimis rule to financial institutions for both manufacturing and 501(c)(3) bonds.
Currently, only non-financial institutions can take advantage of deduction allowances for tax-exempt bonds, CDFA told the working group. These institutions can deduct 80% of their interest deductions as long as their share of tax-exempt bonds does not exceed 2% of their assets.
“These eight recommended reforms would expand access to capital for manufacturers, support America’s most productive industry, and create jobs now,” CDFA told the working group.