A House Ways and Means subcommittee will hold hearings next week on the use of tax-exempt bonds by state and local governments to raise money for private industry.
Such bonds now account for an estimated 15 percent of the total value of tax-free bonds issued by state and local governments, according to a Congressional Budget Office report released yesterday.
The use of tax-free bonds to lure private investment has triggered a major controversy in Fairfax County where the board of supervisors has accused the county's Economic Development Authority of exceeding its authority in providing low-interest loans to private industry. Various supervisors have questioned a $5.8 million financing agreement for a Marlo Furniture Warehouse in the country and a $7 million development bond to help Richard A. Viguerie build a new office building.
Meanwhile, Treasury Secretary Donald T. Regan told the Senate Budget Committee yesterday that the Treasury was looking "carefully" at the use of industrial revenue bonds. "There have been abuses in our opinion," he said in answer to questions from Sen. Howard M. Metzenbaum (D-Ohio), but he added that changes in the laws and regulations governing these bonds must be made carefully in order not to "hurt the cities of the Northeast."
In the first major report on the history of small-issue industrial revenue bonds, the CBO estimates that these bonds will cost the federal government about $1.4 billion in fiscal 1982. There have been suggestions recently that their use should be restricted further because they are not an efficient way of subsidizing industry.
Regan said that his department's study of this and other "tax expenditures" would not be finished for another couple of months, and so would not be in time for the first budget resolution. Administration officials recently have appeared confused about whether they consider reducing tax expenditures (special tax credits and deductions) a good or bad thing. Budget Director David Stockman, however, has said that because cutting tax expenditures would raise taxes for those who now benefit from them, this would be a bad thing.
But Metzenbaum yesterday reminded the Treasury secretary that Stockman had told the Budget Committee that some tax expenditures were "obsolete, inefficient and unjustifiable."
Small-issue industrial revenue bonds subsidize private industry by raising cheaper capital on tax-exempt state and local bonds than could be get through the market. The federal government bears the cost through a cut in its revenues.
The CBO report points out that it has been hard for Congress to evaluate the revenue loss on these bonds, and there is only sketchy data available on their use.
Sunbelt states first used them in the 1930s to promote industry in predominantly rural areas, the report says. In the last two decades, northern and northeastern states have begun to use them to attract industry and save jobs.
Current law restricts the issue of industrial revenue bonds somewhat. Large issues may be used only for quasipublic services or facilities (pollution control, airports and so on). But there are no federal restrictions on the use of small-issue industrial revenue bonds, and half of the 47 states which issue them also allow companies to use the proceeds as they like.
Small issues are counted as those bonds of no more than $10 million. In addition, if a state floats a bond for more than $1 million, the borrowing firm must not invest more than $10 million in the same county or city for three years before and after the issuance of the bond.
There is no framework for reporting these bonds, and the CBO's is the first comprehensive study of their use. It suggests that by 1986 small issues could amount to between $15 billion and $49 billion, and cost the federal government between $2.9 billion and $4.4 billion.
In yesterday's hearings, Regan indicated that the administration may not change the current tax law allowing oil companies to write off in one year intangible drilling costs for oil. This has been attacked as an unnecessary loophole. "I am not sure we will change that," he told Budget Committee members.