[Vision2020] A Stealth Tax Subsidy for Business Faces New Scrutiny

Art Deco art.deco.studios at gmail.com
Tue Mar 5 03:46:47 PST 2013


  [image: The New York Times] <http://www.nytimes.com/>

------------------------------
March 4, 2013
A Stealth Tax Subsidy for Business Faces New Scrutiny By MARY WILLIAMS
WALSH<http://topics.nytimes.com/top/reference/timestopics/people/w/mary_williams_walsh/index.html>and
LOUISE
STORY<http://topics.nytimes.com/top/reference/timestopics/people/s/louise_story/index.html>

The last time the nation’s tax code was overhauled, in 1986, Congress tried
to end a big corporate giveaway.

But this valuable perk — the ability to finance a variety of business
projects cheaply with bonds that are exempt from federal taxes — has not
only endured, it has grown, in what amounts to a stealth subsidy for
private enterprise.

A winery in North Carolina, a golf resort in Puerto Rico and a Corvette
museum in Kentucky, as well as the Barclays Center in Brooklyn and the
offices of the Goldman Sachs Group and the Bank of America Tower in New
York — all of these projects, and many more, have been built using the
tax-exempt bonds that are more conventionally used by cities and states to
pay for roads, bridges and schools.

In all, more than $65 billion of these bonds have been issued by state and
local governments on behalf of corporations since 2003, according to an
analysis of Bloomberg bond data by The New York Times. During that period,
the single biggest beneficiary of such securities was the Chevron
Corporation, which issued bonds with a total face value of $2.6 billion,
the analysis showed. Last year it reported a profit of $26 billion.

At a time when Washington is rent by the politics of taxes and deficits,
select companies are enjoying a tax break normally reserved for public
works. This style of financing, called “qualified private activity bonds,”
saves businesses money, because they can borrow at relatively low interest
rates. But those savings come at the expense of American taxpayers, because
the interest paid to bondholders is exempt from taxes.

What is more, the projects are often structured so companies can avoid
paying state sales taxes on new equipment and, at times, avoid local
property taxes. While some deals might encourage businesses to invest where
they might otherwise not have invested, there are few guarantees that job
creation or other economic benefits actually occur.

Budget analysts say these bonds amount to a government subsidy, in the form
of forgone tax revenue. While 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.

“The federal government doesn’t cut a check for this, but it costs the
government in terms of lower tax revenue,” said Lisa Washburn, a managing
director at Municipal Market Advisors, an independent municipal research
firm in Concord, Mass., that assisted The Times with its analysis.

“If these companies were to issue taxable bonds instead, then the federal
government would receive tax revenues on them.”

Ms. Washburn added that the gain to companies, and bond buyers, can be big
and long-lasting.

Chevron used most of its federally tax-free borrowings to expand a refinery
in Pascagoula, Miss. Archer Daniels Midland, the agribusiness giant, used
about $180 million in tax-exempt bonds to improve its grain-processing
facilities in Indiana and Iowa. Alcoa raised $250 million to renovate an
aluminum plant in Iowa.

Such financing arrangements are now worrying some state and local
officials. Many are concerned that the budget battles in Washington will
mean less federal money for them, and that the federal government might try
to limit the scope of their own tax-free financing.

Some of the subsidized business projects are almost indistinguishable from
public works. American Airlines, for instance, another big user of
tax-exempt bonds over the last decade, used $1.3 billion of these
securities to finance a new terminal at Kennedy International Airport. That
terminal is owned by the City of New York; American is the builder, the
borrower and a tenant.

As political controversy over the federal deficit has mounted, some fiscal
experts have taken aim at this sort of tax-exempt borrowing. The team at
the Bipartisan Policy
Center<http://bipartisanpolicy.org/projects/debt-initiative/about>led
by Alice M. Rivlin, a former member of the Federal Reserve, and Pete
V.
Domenici, the former Republican senator, has called for ending it. A
spokeswoman for the center said that such a change could bring in $50
billion for the federal government over 10 years.

The Obama administration would take a different approach, capping the value
of the tax break that wealthy bond buyers enjoy, whether they buy private
activity bonds or conventional municipal
bonds<http://topics.nytimes.com/top/reference/timestopics/subjects/m/municipal_bonds/index.html?inline=nyt-classifier>.
Some of the bonds in The Times’s analysis are subject to the alternative
minimum tax<http://topics.nytimes.com/top/reference/timestopics/subjects/a/alternative_minimum_tax/index.html?inline=nyt-classifier>,
but taxpayers who incur the A.M.T. typically do not buy those bonds. There
are also tax-exempt private activity bonds that are used for hospitals and
universities. The Times did not include those in the analysis, because they
do not benefit profit-making companies.

It was Ms. Rivlin who, as founding director of the Congressional Budget
Office, issued one of the first major reports on private activity bonds,
which the report said were invented by officials in Mississippi eager to
attract business during the Depression. In a 1981
report<http://www.gao.gov/assets/280/272369.pdf>,
Ms. Rivlin found that the bonds were in much wider use than previously
understood. Companies were using the federal subsidy to build Kmarts,
McDonald’s restaurants, private golf courses and tennis clubs — even a
topless bar and an adult bookstore in Philadelphia.

“These trends have cast into sharp relief the questions concerning the
public purpose” of the subsidy, Ms. Rivlin wrote at the time. “So far,
federal legislation has left the definition of ‘public purpose’ to state
and local governments.”

Finally, in 1986, in a sweeping tax reform signed by President Ronald
Reagan, Congress set limits on qualified private activity bonds, giving
each state a yearly allotment. Some projects, like airports and wharves,
were not subject to the yearly limits. Others could not be financed with
tax-exempt bonds at all, including golf courses, stadiums, hotels, massage
parlors and tanning salons.

But over time, Reagan-era concerns about budget deficits faded, and so did
some of the limits on tax-exempt private activity bonds. The Government
Accountability Office reported in 2008 that use had risen to a record high
and that once-forbidden projects like stadiums, hotels and golf courses
were back.

“It is not clear whether facilities like these provide public benefits to
federal taxpayers,” the G.A.O. stated in its
report<http://www.gao.gov/assets/280/272369.pdf>.


In the years since 1986, Congress has lifted the caps on some states’ or
cities’ allotments, often in response to natural disasters and other
emergencies.

After the terrorist attacks in 2001, for example, Congress approved $8
billion worth of tax-exempt Liberty Bonds, which were in addition to New
York State’s normal allotment and could be used to keep companies from
moving out of the neighborhood near ground zero. Goldman Sachs used around
$1.6 billion of tax-exempt bonds under the program to help pay for its
headquarters in Lower Manhattan. In a related program, Goldman agreed to
keep 8,900 jobs in the city but has not met that level for the last three
years, according to public records.

A spokesman for Goldman did not dispute that its jobs levels have been
below 8,900 but said the bank was meeting its obligations.

The Liberty Bond program allowed for a limited amount of tax-exempt
financing for projects beyond Lower Manhattan. That’s how One Bryant Park
L.L.C. was able to use $650 million of tax-exempt bonds to build the Bank
of America Tower in Midtown.

In 2005, Congress created a similar program to spur rebuilding in areas of
Louisiana, Alabama and Mississippi that were ravaged by Hurricane
Katrina<http://topics.nytimes.com/top/reference/timestopics/subjects/h/hurricane_katrina/index.html?inline=nyt-classifier>.
The Times’s data shows that much of the bond proceeds went to the oil and
gas industry, or to showcase projects like hotels or the Superdome. In
2008, Congress passed the Heartland Disaster Tax Relief
Act<http://www.irs.gov/uac/Tax-Law-Changes-Related-to-Midwestern-Disaster-Areas>,
a bond program to help 10 Midwestern states hit by flooding and tornadoes.
The goal was to help businesses rebuild their destroyed property. But by
the time the program was set to expire at the end of last year, the
criteria had been expanded to include new businesses.

One of those businesses was Orascom Construction Industries of Egypt, which
raised $1.2 billion of tax-exempt bonds to build a
fertilizer<http://topics.nytimes.com/top/reference/timestopics/subjects/f/fertilizer/index.html?inline=nyt-classifier>plant
in Iowa. Another was the Fatima
Group of Pakistan<http://www.courierpress.com/news/2013/jan/11/fertilizer-herp/>.
In December, a Fatima subsidiary raised $1.3 billion, tax-exempt, to build
a fertilizer plant in Mount Vernon, Ind.

But weeks later, Indiana received alarming news: Pentagon officials said
that fertilizer from Fatima’s operations in Pakistan had been turning up in
Afghanistan, in homemade bombs used against American troops. Gov. Mike
Pence of Indiana<http://www.courierpress.com/news/2013/feb/26/54-hed1-15-inches-of-story/>has
delayed the project while the Defense Department investigates. The
$1.3
billion is now sitting in escrow and will have to go back to the bond
buyers if the project is rejected.


-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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