On top of billions of dollars in tax incentives that state and local governments offer businesses to relocate or expand, there is another unwarranted gift from taxpayers that major corporations have been enjoying: tax-exempt bonds. State and local governments are increasingly issuing these bonds on behalf of private corporations. The money has financed major building projects for oil and gas companies, a golf resort and even the construction of banks. As Congress debates how to reduce the federal deficit, cracking down on this corporate welfare would be a good place to start.
Tax-exempt bonds are intended to help finance large-scale public works projects such as roads, bridges and schools. Bond buyers get a lower interest rate, and in exchange the investors don't pay taxes on the interest. This kind of tax break is an invisible way to reduce federal revenues, exacerbating the federal deficit. But it is justified when it goes toward public infrastructure.
A "qualified private activity bond" offers the same deal except the construction project is for private enterprise. There is a narrow range of activities where it makes sense for the public to help subsidize development for a public purpose, such as a new airline terminal on publicly owned airport property. The problem arises when sensible limits are ignored by cities and states eager to lure businesses and jobs. According to an analysis by the New York Times, since 2003 more than $65 billion of these bonds have gone to corporations.
For instance, Chevron Corp., a company that made $26 billion in profits last year, has been the biggest single beneficiary since 2003. And it is far from alone. Tax-exempt bonds have been used to fund a golf resort in Puerto Rico, the construction of the Goldman Sachs Group offices and the Bank of America Tower in New York and even a winery in North Carolina.
In Florida, the city of South Miami had to repay $6.6 million to bondholders who bought tax-exempt bonds for a five-story garage with retail space in the city's downtown. The money settled an Internal Revenue Service investigation in 2011 after the project was deemed a private enterprise, not a public benefit.
When the federal tax code was overhauled in 1986, there was an effort to put limits on private activity bonds, with each state given a yearly allotment, but over time some caps have been lifted. Now public bonds are used so widely to fund private projects that one estimate from the Bipartisan Policy Center, a group headed by Alice Rivlin, a founding director of the Congressional Budget Office, and Pete Domenici, a former Republican senator, says they may cost federal taxpayers $50 billion over 10 years.
This kind of corporate welfare cheats the federal treasury and enables government to give an unfair advantage to one business over another. As lawmakers in Washington consider how to dig the country out of its deficit, limiting this tax subsidy is fertile soil.