In the name of "revenue enhancement," the U.S. Treasury is mounting a deadly assault on one of the country's most successful economic programs. Its target is industrial revenue bonds (IRBs) -- tax-exempt bonds that state and local governments sell to finance business expansion, primarily by small firms.
Armed with tales of a few well-publicized abuses -- such as IRB funding for a country club, a go-go bar, and a few McDonald's and K mart stores -- Treasury officials, who sense the time is right, are trying to push through Congress "reforms" that will virtually eliminate the benefits of IRBs for small business. They are ignoring documented evidence that IRBs have helped create thousands of private-sector jobs at low cost to the government, and without adding a single bureaucrat to the federal payroll.
The Treasury's campaign to rein in the tax-exempt bond privileges of state and municipal governments goes back many years. The latest attack began last August when the Internal Revenue Service suddenly prohibited the decadeold practice of marketing IRBs in pools, which is essential to selling public bond issues for small business. This February, the Treasury said that it would permit pools again if Congress would enact certain restrictions on IRBs. In other words, it is holding IRBs for small business hostage until the measures it seeks are adopted.
One proposed rule would force borrowers to choose between IRB financing and the accelerated depreciation schedules included in the 1981 Economic Recovery Tax Act. Another would require state and local governments, beginning in 1985, to contribute financially to IRB-financed projects. A third would limit IRB borrowers to $20 million in nationwide capital expenditures -- counting both IRB and non-IRB financing -- over a six-year period. A fourth would limit each company to $10 million in IRB loans outstanding at any one time.
The Treasury asserts that forcing a choice between accelerated depreciation and IRBs will prevent what it calls "double dipping." In fact, this will mainly curtail expansions by smaller firms. In times of tight credit, it's no secret that funds for small businesses dry up before they do for their larger competitors. A small company able to raise expansion capital at a reasonable rate only through an IRB would have to depreciate its building over 35 years, while its bigger competitor will be allowed accelerated 15-year depreciation.
Congress adopted both IRBs and accelerated depreciation to achieve the same objectives: to create jobs and stimulate private investment in new productive assets. Considerable evidence shows that small business has been the most significant source of new jobs in the country in recent years. Small firms need -- and deserve -- both incentives.
The proposed $20-million, six-year, capital-spending ceiling and the $10-million ceiling on outstanding loans are too strict for many fast-growing small firms. Yet these are the very ones that create the most jobs and contribute the most of the economy and to government tax coffers.
Are IRBs as abused and costly as the Treasury claims? Let's separate rhetoric from fact about the costs and benefits of IRBs.
Rhetoric: IRBs help large national corporations which don't need the assistance.
Fact: The Congressional Budget Office found in a 1981 study that IRBs have been used overwhelmingly by small businesses. For example, more than 90% of all IRBs have been issued for closely held firms not listed on any stock exchange, and therefore dependent on local sources of financing. Only 7% of IRB issues went to Fortune 1,000 companies.
Rhetoric: IRBs are inefficient and costly to the federal government.
Fact: The CBO projected that if IRBs were eliminated, the government would raise only $200 million more in taxes in 1982, rising to $700 million in 1986. And the Treasury's own proposal shows a decline in 1983 revenues if its IRB restrictions are adopted. A study at the University of Chicago for the Smaller Business Foundation of America shows that the revenue losses are much lower than the Treasury or the CBO estimate. Why? Most IRB investors are attracted away from alternative investments on which they would pay little or no income tax, such as equities, collectibles, or real estate. In addition, without IRBs, borrowers would pay higher interest rates and would deduct these on their tax returns, thereby reducing their tax payments.
The concept that IRBs actually increase tax revenues is hardly a crackpot notion. In 1980, economist Norman Ture, now the U.S. Treasury's undersecretary for tax and economic affairs, studied IRBs and concluded: "IRBs are productive instruments for promoting economic development by making saving and investment more attractive to individuals and businesses... The resulting expansion of tax bases -- individual and corporate income and payroll taxes -- would generate net gains in tax revenues for the federal government and for the state and local governments of the issuing jurisdictions."
Rhetoric: IRBs are out of control because they have over-generous eligibility criteria.
Fact: Though high interest rates have caused an increase in IRB financing in recent years, because of inflation today's $10-million ceiling per municipality for each company actually means that a company can buy less plant and equipment than it could under the original $5-million limit enacted by Congress in 1968. As the CBO noted, "The $10-million... limit effectively keeps most large corporations from making much use of [IRBs]."
Rhetoric: IRBs don't help distressed areas.
Fact: Though originally developed to lure northern industry to the South, in recent years two-thirds of all IRSs have benefited employers in the Frostbelt states. And many states earmark IRBs specifically for distressed areas. For example, the Massachusetts Industrial Finance Agency has been able to attract $140 million of investment to distressed downtown areas by using IRBs for specific commercial real estate projects.
Commercial real estate projects such as regional shopping malls, which pull shoppers away from economically distressed downtowns, are the most often cited abuses of IRBs. Yet Treasury staffers have consistently refused reforms that would directly eliminate this abuse. Instead, the Treasury intends to make all tax-exempt bonds as unattractive as possible.
Rhetoric: The IRB program stimulates little additional private investment. Almost all of the investment that occurs with IRBs would occur without them.
Fact: The CBO estimated that in 1986 IRBs would generate over $4 billion in additional gross national product, including $2.2 billion in private salaries and wages. That would serve to pay 150,000 workers at $15,000 a year each. If these IRBs take away $700 million from federal revenue in the same year, as the CBO estimated, the program would cost about $4,700 a job -- vastly less per job than the CETA program, for example.
In Massachusetts we have seen first-hand the impact that small business private investment can have. For decades, traditional New England industries left Massachusetts for other states and countries with cheaper labor. From 1960 to 1975 the Commonwealth lost 120,000 manufacturing jobs -- one-fifth of all such jobs existing in 1960. The state hit bottom in 1975 when unemployment reached nearly 50% more then the national average.
Since then the growth of high-technology companies and many traditional industries has buoyed the state's economy. Unemployment in the state over the past three years has been consistently lower than the national average, and second only to Texas as the lowest among the 10 major industrial states.
The Massachusetts Industrial Finance Agency has stimulated much of this growth with industrial revenue bonds often combined with loan guarantees. Projects assisted with bonds in the last two years alone will result in over 12.5 million square feet of new industrial space. Companies using the bonds will create 47,000 new permanent jobs and 18,000 man-years of construction work.
Smaller companies have overwhelmingly been the beneficiaries of this financing. One-half of the companies aided by the agency had sales of less than $5 million, and three-fourths had sales of less than $20 million.
Recently we surveyed companies that had received IRBs to determine how important the lower interest rates were to their expansion. Coopers & Lybrand reviewed and certified the result. Of the 200 companies responding, 93% would have been forced to reduce their expansions without IRBs. One-third would have canceled their expansion outright; another third would have delayed their growth; and one-fifth would have cut their expansions, on average, by 40%.
Thus far, IRB opponents are winning the fight in Washington. IRBs can be saved only if small businesspeople, and the thousands of employees who owe their jobs to IRB-financed plants, express their dismay to their congressmen over the Treasury Department's latest attack.
Small business -- and the country -- can't afford to lose this battle.