Companies Take Advantage of Tax-Exempt Bonds ; Corporations across U.S. Benefit from Exemption Intended for Public Works

By Mary Williams Walsh; Louise Story | International Herald Tribune, March 6, 2013 | Go to article overview

Companies Take Advantage of Tax-Exempt Bonds ; Corporations across U.S. Benefit from Exemption Intended for Public Works


Mary Williams Walsh; Louise Story, International Herald Tribune


A tax break originally aimed at public works like building roads and schools is being used by private companies to fund new projects.

The last time the U.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 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, a sporting and entertainment arena, 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 Chevron, which reported a profit of $26 billion last year.

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 of these 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 U.S. 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, Massachusetts, 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 tax-free borrowings to expand a refinery in Pascagoula, Mississippi. 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 money for them and that the U.S. 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 past 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 U.S. deficit has mounted, some fiscal experts have taken aim at this sort of tax- exempt borrowing. The team at the Bipartisan Policy Center led by Alice M. …

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