The New York Times article, "A Stealth Tax Subsidy for Business Faces New Scrutiny," is riddled with inaccuracies of a critical development tool: private activity bonds. The story, sensational and misleading, highlights perceived misuses and abuses, while ignoring the essential public purpose that bonds serve. PABs are an instrument, endorsed by Congress, that catalyze private investment that may not receive conventional financing.
The Times states that the 1986 tax code created a "stealth subsidy for private enterprise." Stealth? The tax-exempt bond section of the IRC dates back 100 years and allows 50,000 issuers access to this financing tool. Yet PABs amounts to a fraction of the tax-exempt market. PABS are decisively not stealth, and are one of the most regulated parts of the reformed 1986 code. The end result is a valuable financing tool — not a "stealth subsidy." The inference that PABs are a secret that allows private business to benefit where others would not is naive. Private business prefers conventional lending, but given project economics, some require alternatives.
The article identifies some potentially alarming projects: a golf course, museum, basketball arena and office buildings. While these projects seem less worthy of tax-exempt financing, a cursory review is irresponsible. These projects represent a fraction of the overall number of deals that benefit from PABs. PABs are issued on behalf of thousands of private enterprises annually. These projects were supported by local governments with their understanding that they were important to economic development.
The same goes for the special bond programs targeted in the Times such as New York Liberty Zone bonds, GO Zone bonds and Midwestern Disaster Area bonds. These programs were created with bi-partisan Congressional support and supported by two presidents. These programs addressed the devastation from hurricanes, floods and recessions. They work independent of the 1986 tax code as broadened bond tools not related at all to the established use of PABs. They have no bearing whatsoever on the PAB policy discussion.
The Bank of America and Goldman Sachs buildings provided needed economic stability to New York after 9/11. Through Liberty Zone bond financing these projects signaled to the world that the city was open for business and that we would rebound. Without this financing, those institutions may not have chosen to re-locate in the city. The redevelopment of the World Trade Center has been financed using Liberty Zone bonds. Would the Times suggest that this is an abuse? Congress should be applauded for creating these programs, not criticized for supporting America.
The Times article implies that the government is forgoing tax revenue by offering lower rates and interest free income through PABs. Wrong again. Little is lost by the federal government because most of these projects would not have proceeded without this financing. How can the federal government lose revenue when they never had it in the first place? The notion that the projects would have happened and that taxable bonds could have been used is not supported by data. And this is to say nothing about the economic activity and job growth from these investments.
As the article states, "it is difficult to calculate the precise dollar amount of the subsidy, given the number and variety of these bonds, experts say the annual cost to federal taxpayers could run into the billions." If the argument is that PABs are an unfair subsidy, why can't the Times produce any data that references a single amount of lost revenue? Why? Because this assertion is unsubstantiated.
PABs present zero risk to government. They are non-recourse bonds that have virtually no impact on tax revenues. In the event that a project goes bad, the bond holders, who knowingly invested, are the only stakeholders impacted. Neither government nor citizens are impacted. Defaults are extremely rare and the tax-exempt bond market performs better than all fixed-income investment markets.
The article attempts to draw a connection between 1980s tax reform and the current state of affairs on Capitol Hill. There are proposals for eliminating or capping the use of PABs but that is not the whole story. Current proposals have suggested a cap or elimination of all tax-exempt bonds, including for public purposes like roads, bridges, sewers, energy, schools, and hospitals. They have done so under the auspices of deficit reduction — not as policy reforms. These actions, universally rejected, would burden state and local government by driving interest rates up and increasing the cost of project financing. The end result would be higher local taxes and economic development stagnation.
Finally, the Times infers that tax-exempt bonds are funding terrorists. This assertion is dangerous and inflammatory. To suggest that there was any knowing attempt to finance a project that benefited terrorism is fear-mongering.
The decades-long story of PABs is one of business, job creation and economics. Take the case of Qualified Small Issue Manufacturing Bonds, commonly known as Industrial Development Bonds. IDBs allow the public sector to assist manufacturers with expansion, investment and job creation. Low?cost and efficient capital access remains a major concern for manufacturers. These bonds are highly regulated with limitations governing their use. They are issued in small quantities; no more than $10 million, and fill a need that conventional lending cannot.
Alabama issued two IDBs for small manufactures to support over 300 jobs. Virginia issued a $1.5 million IDB to help support 42 important machine shop jobs. Maybe Michigan presents the best example, where three small IDBs helped create and retain over 210 jobs. For states hemorrhaging manufacturing jobs, it is hard to argue against the impact of this tool.
The New York Times would have state and local governments cease assisting these borrowers, the lifeblood of many communities. I and millions of others disagree.
The development finance community calls on the Times and Congress to engage in an open, constructive and educated dialogue on private activity bond policy.
Toby Rittner is president & CEO of the Council of Development Finance Agencies.