The New York Times had a piece today by Mary Williams Walsh and Louise Story about companies using tax-exempt bonds to finance projects.
The timing was excellent giving the current debate over corporate tax rates. Here are some of the details.
The last time the nation’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 federal 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 in Brooklyn and the offices of both the Goldman Sachs Group and 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 the Chevron Corporation, which last year reported a profit of $26 billion.
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.
But not all of these projects are bad. The story does point out that American Airlines is using this type of financing to build a new terminal at JFK International Airport.
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 last 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.
The story then goes through some useful background and history of the bonds, how they’ve been used and some of the criticism they’ve received. Here is an example of recent uses of the bonds.
In the years since 1986, Congress had lifted the caps on some states’ or cities’ allotments, often in response to natural disasters and other emergencies.
After the terrorist attacks on the World Trade Center in 2001, for example, Congress approved $8 billion worth of tax-exempt Liberty Bonds, which were in addition to New York State’s normal allotment and could be used to keep companies from moving out of the neighborhood near ground zero. Goldman Sachs used around $1.6 billion of tax-exempt bonds under the program to help pay for its headquarters in Lower Manhattan. In a related program, Goldman agreed to a goal to keep 8,900 jobs in the city but has not met that level for the last three years, according to public records.
A spokesman for Goldman Sachs did not dispute that its jobs levels have been below 8,900 but said the bank was meeting its obligations.
The Liberty Bond program allowed for a limited amount of tax-exempt financing for projects beyond Lower Manhattan. That’s how One Bryant Park L.L.C. was able to use $650 million of tax-exempt bonds to build the Bank of America Tower in Midtown.
The story ends with examples of several overseas companies getting financing through this measure. I think it could have been slightly more balanced, possibly pulling out more than one example of a bond deal that was used to benefit the public like the new terminal at JFK.
But in the end, the story serves an important purpose by pointing out the public another way large companies and sophisticated investors are benefiting from government programs.
What the story could have used is someone pointing out the jobs created, the economic boost these projects bring and some of the other benefits that come with new construction projects. With the nation’s unemployment rate still fairly high and government spending taking a drastic cut, we just may need more of these types of public/private deals.
