A group of senators last week reintroduced a bill to expand the permissible projects for which private-activity industrial development bonds can be used to include intangible property, and its advocates are lobbying to have the measure wrapped into a forthcoming economic recovery package.
The bill was introduced by Sens. Olympia J. Snowe, R-Maine; John Kerry, D-Mass.; Blanche Lincoln, D-Ark.; and Sherrod Brown, D-Ohio; and sent to the Senate Finance Committee last week. It would amend the Internal Revenue Code of 1986 to make "intangible property" such as software and biotechnology manufacturing eligible for funding with the proceeds of industrial development bonds. The IDBs currently allow state and local development finance authorities to issue tax-exempt bonds for the purpose of low-cost financing of manufacturing facilities.
The bill's sponsors previously introduced it in April 2008 - with Sen. Gordon Smith, R-Ore., as the cosponsor instead of Lincoln - but could not attach it to a larger tax bill by the end of the congressional session, said Toby Rittner, president and chief executive officer of the Council of Development Finance Agencies. He expects a House version to be introduced and is working with Rep. Xavier Becerra, D-Calif., and Rep. Carl Levin, D-Mich., toward that end.
"We're working really hard to get it into a stimulus bill," Rittner said.
He said that regions with strong technology corridors or biotech and agricultural innovation sectors - such as Massachusetts, California, Minnesota, and other New England states - will be most likely to benefit from the legislation.
Rittner estimates the demand for this kind of private activity bond to be around $1.9 billion, based on increase in demand for IDBs that occurred after the capital expenditure limit was increased from $10 million to $20 million for such bonds in 2006. Issuance the following year increased about 158% to a total of about $3.1 billion in 2007, he said.
"If you extrapolate that out, you could potentially see $5 billion in IDB issuances," he said, adding that he knows anecdotally of "dozens and dozens" of projects that could use the funding.
The portion of the tax code that would be affected historically allowed tax-exempt bonds to be issued for manufacturing facilities and commercial development, such as office buildings and shopping centers. But its allowance was narrowed by the 1986 tax reform act to apply only to manufacturing.
The proposed revision would allow bond financing for the creation of such things as business books and records, operating systems, patents and copyrights, customer-based or supplier-based intangibles, or other intellectual property.
"The bill also would include facilities that are functionally related and subordinate to manufacturing facilities," said Thomas D. Vander Molen, of Dorsey & Whitney LLP in Minneapolis. "This is broader than the requirement that they be 'directly related and ancillary' and thus would permit more of a manufacturing facility to be eligible."
While enterprise zone bonds have a similar purpose, Vander Molen explained, they carry restrictions and require the declaration of an enterprise zone.
The National Association of Bond Lawyers issued recommendations last week calling for increased flexibility of the types of facilities that could be financed as tax-exempt private-activity bonds as part of a stimulus package.