The Reagan administration yesterday urged Congress to curb the use of tax-exempt bonds for private purposes such as industrial development, which last year accounted for more than half of all tax-exempt bonds issued.
The bonds have become "a backdoor means of obtaining federal subsidies, usually without explicit congressional approval and sometimes in direct contravention of federal budget policies . . . ," Assistant Treasury Secretary John E. Chapoton told the House Ways and Means Committee.
They have become so popular that $44 billion worth were issued last year--compared with $10.3 billion worth for public-works projects--and "the potential for growth remains large," Chapoton said. They are expected to cost the Treasury an average of $13 billion in each of the next five years, the committee was told.
Yesterday's hearing represented the second time in less than a week that the Ways and Means Committee has been called upon to figure out a way to restrict a tax break that has ballooned well beyond what its framers apparently intended.
Last Wednesday, the panel heard testimony on a bill to curb "sale-leaseback" transactions in which a tax-exempt entity, such as a city or college, sells property to a private concern and leases it back, thus raising cash for itself and allowing the private concern to pick up a tax shelter.
At issue yesterday were bonds for such things as industrial development, pollution control and hospital construction.
In practice, a state or locality issues the tax-exempt bonds, which carry below-market interest rates, and then uses this relatively cheap money to buy land for development or to help private concerns to build factories, hospitals or the like.
The bonds have been allowed for many years, but the recent interest-rate increases, combined with newer tax breaks available to the beneficiaries, has made them far more appealing. In addition, they have been used more "creatively" to finance projects that Congress may not have intended.
Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.), who said he is "alarmed at the rapidly growing use" of the bonds, complained that they are "being issued without any sense of public priority." He cited as examples bonds issued to finance a liquor store and "sky boxes" at a sports stadium in Chicago.
The bonds "have bred like rabbits," added Rep. J.J. Pickle (D-Tex.), who is sponsoring a bill that would prohibit their use with the accelerated cost recovery system, a method of depreciating property for tax deductions over a short period of time.
Pickle's bill also would place limitations on the so-called small issue (less than $10 million) industrial development bonds, restricting them to companies with, first, no more than $20 million in capital expenditures in the three years immediately prior to issuance of the bonds, and second, no more than $20 million in IDBs outstanding after the latest issue.
Backers of the bonds said they have been instrumental in creating or saving tens of thousands of jobs. Ramsay D. Potts, in testimony for the National Committee on Small Issue Industrial Development Bonds, cited figures showing 70,000 jobs "secured" and 44,000 created in Connecticut; 103,707 saved or created in New York; 58,000 created in Massachusetts, and 18,172 created in Texas.
Representatives of utilities defended their use for pollution control, arguing that the cost of cleanup equipment would otherwise fall entirely upon rate-payers. "We feel that this important form of financing represents a unique partnership between the federal government and the electric utilities which was designed to meet the very expensive requirements of an equally important public policy," said Eugene P. Waters of New York State Gas and Electric Corp.
Pickle replied, "We are not proposing to kill industrial revenue bonds, but to cut them back." He estimated that his bill would reduce the federal revenue loss by 10 percent.
That loss has been climbing dramatically, according to Chapoton and Alice Rivlin, the outgoing head of the Congressional Budget Office.
"In real dollars (adjusted for inflation), the volume of tax-exempt bonds for public projects in 1982 was about 5 percent higher than it had been in 1975, whereas tax-exempt financing for private entities was a whopping 300 percent higher," Rivlin testified.
She noted that the expected $13 billion annual revenue lost over the next five years exceeds federal expenditures for highways.
Chapoton also argued that "tax-exempt bonds produce a revenue loss not only in the year of their issuance, but also in each year they remain outstanding."
Both he and Rivlin contended that the growing volume of bonds is driving up the interest rates issuers must pay. "Tax-exempt rates, which historically have tended to be approximately 30 percent lower than conventional rates, are now only 20 percent lower," she said.
This means that bonds issued for traditional uses, such as sewers, roads and bridges, are more costly for the localities floating them.
Arguing that "the limitations adopted in the past have not curtailed the flood," Chapoton recommended that Congress "impose state volume limitations on all private purpose tax-exempt bonds." He conceded that there would be practical problems with such a cap, but contended that they are not insurmountable. And the cap would have the advantage of protecting the federal interest while allowing states to decide which projects most deserve special financing.
He also said that "direct federal assistance, through tax credits or other means" should be considered as an alternative to tax-exempt financing. Such a system would be more efficient, he said, in that more of the subsidy would reach the beneficiaries and less would go to intermediaries such as Wall Street bond houses.