Industrial Development Bonds:

Achievement of Public Benefits Is Unclear

RCED-93-106: Published: Apr 22, 1993. Publicly Released: May 20, 1993.

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Pursuant to a congressional request, GAO reviewed the use and benefits of small-issue industrial development bonds (IDB) for manufacturing, focusing on: (1) the public benefits of IDB; (2) the IDB default rate; and (3) early repayment of IDB.

GAO found that: (1) IDB are being used for their intended purpose of financing small manufacturing projects; (2) most states and the Internal Revenue Code do not require IDB projects to achieve the additional public benefits claimed by IDB proponents; (3) job creation attributed to IDB projects would likely have occurred without them; (4) evidence does not support the contention that IDB achieve such significant public benefits as providing economic growth to depressed areas; (5) private companies benefit substantially from IDB because they decrease the cost of capital, but most developers said that they would have proceeded with their projects in the absence of IDB; (6) less than 1 percent of IDB have defaulted, which may be due to the issuers' and other participants' interest in ensuring that developers are creditworthy and the less burdensome repayments that result from subsidized financing; and (7) only about 4 percent of IDB have been paid off early, and there is no evidence that these projects were subsequently converted to nonmanufacturing purposes.

Matters for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: Title XIII, Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66) permanently extended the authority to issue tax-exempt qualified small-issue bonds (which include industrial development bonds) and placed no restrictions on their use.

    Matter: Given the questions that surround whether IDB are achieving the benefits attributed to them and in view of the tax revenue forgone, Congress may wish to consider not renewing the IDB provision.

  2. Status: Closed - Not Implemented

    Comments: Title XIII, Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66) permanently extended the authority to issue tax-exempt qualified small-issue bonds (which include industrial development bonds) and placed no restrictions on their use.

    Matter: If Congress should act to extend the provision, it may wish to specify requirements to better direct IDB toward achieving public benefits that would not occur from alternative investment of the money. For example, Congress may wish to provide requirements that would direct IDB to economically distressed areas or to start-up companies.

 

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