WHAT DIFFERENCE is there between tax-break "incentives" to lure industries -- and "welfare handouts" for business? Nobody's quite sure in Virginia, where, according to a series of reports by staff writer Thomas Grubisich, taxpayers have helped finance everything from executive airplanes to race-car tracks, supermarkets and a huge furniture store. It all has to do with how loosely state and local officials are interpreting a federal program that permits business loans that are exempt from U.S. income taxes. And unless the criteria for these giveaways are tightened soon, what began as a perfectly reasonable idea is likley to be butchered.
Here's how the program is supposed to work: In 1968, Congress created a scheme to help industry-poor regions lure new businesses. State and local officials could sanction low-interest loans, with interest exempt from state and federal income taxes -- a way for many companies to save millions. The arrangement has been used extensively in the Sun Belt states and is now spreading elsewhere. The rationale has been that while these loans cost the federal and state governments (make that read taxpayers) money, they create jobs and strengthen local economies.
Original thinking was that the loans would go to companies unable to get conventional financing, but critics say the program today is soaking taxpayers -- in 1979, the tax-free loans around the country cost the U.S. Treasury about $1 billion, according to a study by the Congressional Budget Office. Says Rep. Sam Gibbons (D-Fla.), chairman of the House Ways and Means oversight subcommittee, "It appears we're looking at a very wasteful federal subsidy program to promote construction of massage parlors, dirty book stores and fast-food restaurants."
In Virginia, thanks to what is generally considered to be one of the least stringent laws in the country, all sorts of projects seem to quality. In the Norfolk area, for example, industrial bonds were approved for two firms so they could buy private aircraft to fly executives to branch plants. In a Richmond suburb, the arrangement helped finance construction of a supermarket, on grounds the grocery would help out farmers. In Fairfax County, the Marlo chain was able to use the arrangement to save about $1 million on construction of a store; and in Prince William County, an agency is making money brokering the low-interest loans for these projects even though they're being built in other counties.
Reports on these cases have stirred Fairfax authorities to order reviews of county policies; other officials in the state should follow suit. With sensible guidelines, the policy of incentives for certain businesses to locate in a region can bring the intended benefits. But when the arrangements between government officials, bankers and businesses become too cozy and tax breaks are given out too loosely, the danger is that Congress will overreact and kill the whole program.