Congress should reconsider the use of tax-exempt bonds to finance privately used facilities such as stadiums, and the Internal Revenue Service should establish a method for determining when bond issues fail to comply with tax requirements, according to a report released this week by the Government Accountability Office.
"As Congress considers whether tax-exempt governmental bonds should be used for professional sports stadiums that are generally privately used, it should also consider whether other facilities, including hotels and golf courses, that are privately used should continue to be financed with tax-exempt governmental bonds," the report concluded.
The report was commissioned by Senate Finance Committee chairman Max Baucus, D-Mont., and ranking minority member Charles Grassley, R-Iowa. Their staff did not return calls for comment.
The GAO found that while the volume of outstanding state and local governmental tax-exempt bonds has grown significantly in recent years, to over $2.1 trillion in 2006 from $1.4 trillion in 2000, the lost tax revenues from tax-exempt bonds have also increased to an estimated $37 billion in 2007 from about $32 billion in 2000.
The report highlighted the use of governmental bonds to finance hotels and municipal golf courses in particular. It found that tax exempt governmental bonds were used to partly or entirely finance 18 hotels between 2002 and 2006, as well as six golf courses that were opened in 2005.
"Recent congressional hearings have raised questions about using governmental bonds for purposes that are private in nature, such as professional sports stadiums, but similar attention has not been focused on other types of facilities that are essentially private in nature," the report said.
Meanwhile, the GAO also addressed the percentage of bond proceeds taken up by issuance costs. For every year between 2002 to 2005, 17 to 39 qualified private-activity bonds reported issuance costs that exceeded applicable statutory limits. Those bonds accounted for 1% to 2% of the bonds for which issuance costs were reported. Generally, issuance costs cannot exceed 2% of the proceeds of qualified private-activity bonds.
As a result, the study recommends the IRS clarify its forms used for reporting issuance cost, as well as develop methods for tackling noncompliance issues with regard to the statutory issuance cost limits.
In a letter responding to the GAO findings, which was included in the report, IRS acting commissioner Linda E. Stiff agreed with the two recommendations. She said that the IRS plans to clarify instructions for IRS Form 8038 to "clearly indicate" when no bond proceeds were used to pay for issuance costs, and will develop a project to address non-compliance with issuance cost requirements.
Despite its conclusions and recommendations, Mark Scott, a partner at Vinson & Elkins LLP and former head of the IRS tax-exempt bond office, is skeptical that the report will lead to any significant action by lawmakers.
"I don't think this report helps anybody, really, to make any kind of decisions from a legislative standpoint," he said yesterday. "I don't really blame the GAO because the GAO really just has limited facts to deal with."
If anything, Scott said he expects the report will increase pressure on the IRS to collect more and more specific data on tax-exempt bonds.
"I suspect that they will continue trying to figure out ways to increase data collection in other areas," he said." As the costs of the tax expenditure goes up, there is going to be more and more demand [for information] about where this money is going."
Scott added that the 17 to 39 issuance cost violations that GAO said the IRS uncovers each year out of the thousands of forms sent in could simply be due to typos made on the forms.
"I would bet most of those are transcription errors," he said. "It's a manual-entry, people sitting around in a little desk typing this stuff in."
IRS officials also could not be reached for comment.