The New York Times article, A Stealth Tax Subsidy for Business Faces New Scrutiny, is riddled with inaccuracies and misinterpretations of one of the nation’s most important economic development tools: qualified private activity bonds (PABs). The story, sensational and misleading throughout, highlights perceived misuses and infers abuses of the U.S. tax code, all the while ignoring the essential public purpose that these bonds serve. PABs are exactly as they sound, a bond instrument, supported and endorsed by the United States Congress since 1914, that catalyze private investment in projects and industries that may otherwise not receive conventional financing. PABs are one of the oldest tax policies on record and were included in our Nation’s first formal tax code.(Emphases added)
Consider by contrast the observation by sports economist Andrew Zimbalist in his 2003 book, May the Best Team Win: Baseball Economics and Public Policy, where he wrote:
While one may legitimately question the costs and benefits to a particular metropolitan area of attracting a professional sports team, there appears to be no rationale whatsoever for the federal government to subsidize the financial tug-of-war among the cities to host ball clubs. If there is a global welfare gain from the relocation of a team from city A to city B (because city B may be larger or wealthier or have more avid sports fans), then city B ought to able to pay for that gain without a subvention from Washington, D.C.Of course Zimbalist did not raise that point in the 2004 and 2005 reports on Atlantic Yards that he produced at the behest of developer Forest City Ratner.
Conventional financing preferred?
Let’s address the article’s inaccuracies. First, the Times states that the 1986 tax code created a “stealth subsidy for private enterprise”. Stealth? The tax exempt bond section of the Internal Revenue Code is very well established, dating back 100 years, and it allows over 50,000 state and local bond issuers throughout the country access to this critical financing tool. The PAB market amounts to just a fraction of the total market for tax-exempt bonds. This tool is decisively not stealth, and in fact is one of the most well understood and well regulated parts of the tax code. They were, as the article indicates,Why would they prefer to use conventional lending tools if they can save enormous sums via tax-exempt bonds? Forest City Ratner will save perhaps $150 million from the federal tax subsidy for the arena bonds.
well vetted during the long and transparent tax reform process of 1986. The end result was an improved development finance tool – not a “stealth subsidy”. The inference that PABs are a secret or a loophole that allows large private business interests to benefit where others would not is either naïve or purposefully misleading. Most private businesses would prefer to use conventional lending tools, but given market and project economics, some require alternative lending options to access capital. The private activity bond market provides this critical access to capital.
A few bad apples?
Second, the article identifies a handful of potentially alarming projects – a golf course, museum, basketball arena and office buildings for two financial institutions. There are two substantive flaws in the Times article. While these projects may seem less worthy of tax-exempt financing on their face, such a cursory review is irresponsible at best. To begin, the identified projects represent a mere fraction of the overall number of projects that benefit from PABs. PABs are issued on behalf of thousands of private enterprises like small manufacturers, non-profits, veterans, housing developers, universities, first time farmers, cultural institutions, hospitals and renewable energy providers annually. Further, each of these projects were supported and approved for PAB financing by state or local governments with their understanding that the projects were important to the economic development and long range stability of their communities.Or, alternatively, they were supported because local economic development officials knew they could offer a carrot to a sports facility developer--as with the new stadiums for the Mets and Yankees--with little cost to local taxpayers.
No loss to the feds?
Third, the Times article implies that the federal government is forgoing tax revenue by offering lower interest rates and interest free income through PABs. This could not be further from the truth. Little is lost by the federal government because, in the vast majority of these deals, the projects would not have otherwise proceeded without the tax-exempt bond financing authorized by the federal government and issued by local governments. More plainly stated, how can the federal government lose revenue when they never had it in the first place? The notion that the projects would have happened anyway and that investors would have otherwise invested in taxable instruments is not supported by data or by any reputable development finance professional – it is an academic theory.Wait a sec: had there been no federal tax-exempt bonds, would that have stopped the Atlantic Yards arena, able to take advantage of a new media market and luxury suites, and to offer a home for the woebegone Jersey-based Nets?
Wouldn't Bruce Ratner and his partners simply been forced to take on some additional partners, or to hold back on some of the bells and whistles?