Critics say tax-free financing not for Big Macs
Automatix took the bait.
The nascent robotics company, lured largely by the promise of tax-subsidized financing, will plunk down a new plant in Billerica, Mass. The 69,000 -square-foot plant will be paid for with a small industrial development bond - a controversial cash-raising tool, issued by a state agency, which requires Washington indirectly to pick up part of the tab.
''We really wanted that financing,'' says Dan Nigro, Automatix vice-president for manufacturing. Without it, ''we probably would have gone to another spot.''
Supporters say the Automatix deal shows industrial development bonds (IDBs) at their best: creating jobs, encouraging new technology, helping old manufacturing towns to broaden their employment base.
But the embattled bonds are again under attack. Originally intended to attract fledgling companies, they're sometimes snapped up by big fish such as McDonald's, K mart, and Merrill Lynch. Angered by such abuses, critics say the use of IDBs has reached dangerous levels, crowding out traditional municipal finance - and serving the private good at public expense.
''A lot of people think it's a problem that needs to be addressed,'' says an aide to a congressman who oversees the issue.
Industrial development bonds were created to fight the lingering joblessness of the depression. Issued by states and local municipalities, they finance new factories, stores, and other business facilities.
IDBs are not direct cash subsidies. They are paid off by the enterprise that benefits from them. But they offer interest exempt from federal income tax, and thus carry below-market rates - usually about two-thirds of the prime rate.
States and towns get jobs, and companies get cheap financing.
Congress has limited large IDBs to semipublic services, such as airports or pollution control. But ''small issue'' IDBs, under $10 million, have few federal controls.
Their use has exploded. In 1975, about $1.3 billion small IDBs were issued, the Congressional Budget Office estimates. In 1980, the figure was $8.4 billion, and by 1986 it could rise to $14.7 billion, the CBO figures.
With growth has come a string of highly publicized abuses, with cash-flush corporations cutting their costs by using IDBs. Over the last decade, small IDBs have helped build 32 McDonald's in Pennsylvania and Ohio, financed 35 K mart stores, and been used for everything from dentists' offices to golf courses. The most publicized misfire of all was a $400,000 IDB used to purchase an adult bookstore in Philadelphia.
Critics claim such abuses show that IDBs often create jobs that would appear anyway.
''They work, in terms of helping people with money to expand with cheap credit,'' a congressional aide says.
IDBs may also artificially raise the cost of traditional tax-free municipal bonds - a charge that even supporters admit has some merit. And letting states dangle bait paid for by someone else (the federal government) through forgone tax revenues is poor public policy, congressional sources say.
The Reagan administration, scrambling for revenue, is trying to greatly restrict use of small IDBs.
Under proposals included in the 1983 budget, businesses benefiting from small IDBs wouldn't be able to use accelerated depreciation to write off their investment. Any company spending more than $20 million for capital equipment over a six-year period would be ineligible for IDBs; and no company could benefit from more than $10 million of the bonds at a time.
Finally, the administration would require the state or local government to pay 1 percent of each project's cost.
Such changes would raise $3.2 billion through 1986, the Treasury estimates.
IDB supporters say the administration is not trying to raise revenue, or curb abuses, but to eliminate the program.
''The Treasury has never had the slightest interest in going after the real abuses,'' says Robert Patterson, executive director of the Massachusetts Industrial Finance Agency.
Mr. Patterson points to an MIT study which estimates that IDB-stimulated growth, in Massachusetts alone, will yield $304 million in federal income taxes between 1983 and '87. A CBO study found that the bonds were used overwhelmingly by small business, he says, with but 7 percent going to Fortune 1,000 companies.
Prohibiting accelerated depreciation for structures financed with IDBs will ''destroy'' the program, Mr. Patterson says. But he supports forcing state and local governments to pay 1 percent of the program.
A Treasury Department spokesman, asked whether the administration program went beyond clearing up abuses, replied simply, ''Yes.''
The Coalition of Northeastern Governors has drawn up a package of alternative IDB reforms. They seek to expressly prohibit financing of controversial facilities such as fast-food restaurants, allowing commercial use of IDB money only in economically depressed areas. They would also exclude research and development spending from the capital expenditure limit.
With the budget deadlocked, IDB backers worry that their program will become politically expandable, a quick way of grabbing a few extra tax bucks.
''IDB's, in some form, are going to be in any budget,'' Robert Patterson says.