Industrial Revenue Bonds Research Articles

The origin of LYONs: A case study in financial innovation

The origin of LYONs: A case study in financial innovation

United States – Measures Affecting Trade in Large Civil Aircraft – Second Complaint – Recourse to Article 21.5 of the DSU by the European Union (US – Large Civil Aircraft (2nd Complaint) (Article 21.5 – EU)), DS353

This compliance proceeding under Article 21.5 of the Dispute Settlement Understanding (DSU) concerned measures adopted by the United States to comply with the Dispute Settlement Body (DSB) recommendations and rulings in US–Large Civil Aircraft (2nd Complaint). The types of measures at issue that were found to have caused adverse effects to the European Union (EU, formerly European Communities) in the original Panel and Appellate Body proceedings were NASA aeronautics R&D instruments; United States Department of Defence (DOD) military research instruments (‘assistance instruments’); the business and occupancy (B&O) tax rate reduction in the State of Washington in relation to Boeing's production of the 787; property and sales tax abatements related to Industrial Revenue Bonds issued by the City of Wichita, Kansas; and the FSC/ETI subsidies.

The Effectiveness of State Economic Development Policies: a Time-Series Analysis

IN THE past thirty or more years, state policy-makers have expanded their efforts to improve the health of their state economies by going beyond traditional road and school building activities. New approaches in this area have included the provision of general obligation and industrial revenue bonds, loans and loan guarantees, tax reductions and exemptions, research and development support, and various programs to direct aid to those who are chronically unemployed. (See ACIR 1963, 1967; Conway 1979; Reinshuttle 1983; Council of State Governments 1976; National Association of State Development Agencies et al. 1984; New York Department of Commerce 1983; U.S. Office of Technology Assessment 1983, for descriptions of state programs.) General studies of the process of creating economic growth stress the many factors involved, including innovation, productivity, employment, and taxation, as well as the difficulty in designing and targeting policies for particular outcomes (Bosworth 1984; Rubin and Zorn 1985; Rasmussen et al. 1982a, 1982b; Nelson et al. 1967; Federal Reserve Bank of Kansas City 1983). State leaders, realizing the complexity of the process of economic growth, have frequently enacted a diverse set of policies. These programs are, in many instances, quite expensive in terms of direct program costs, tax expenditures, or both. One tax expenditure in Arizona for 1984-85 cost the state almost $8 million (Arizona Department of Revenue 1985), while two tax expenditures in Massachusetts in 1986-87 were estimated to cost the state nearly $187 million (Massachusetts House of Representatives 1986). If we add to such figures the amounts of other tax expenditures plus program costs, the totals lie in the billions of dollars of state resources. In most states, data on the costs of tax expenditures are not available.

Industrial Revenue Bond Recipients: The Kansas Experience

Industrial revenue bonds have been criticized either because too much IRB money funded retail or commercial projects rather than industrial or manufacturing projects or because large profitable corporations were the major beneficiaries of the bonds. These criticisms, however, were often supported by random citations of questionable cases rather than a thorough investigation of bond usage. This paper investigates IRB usage in Kansas between 1962 and 1983. It particularly focuses on bond usage in the state's largest cities where bonds are categorized by purpose and by recipient to determine the pattern of economic development and the major beneficiaries. This study found that many of the criticisms of industrial revenue bonds were applicable to the Kansas pattern of usage.

Inequality in Metropolitan Industrial Revenue Bond Programs

Industrial revenue bonds (IRBs) have become an increasingly popular, though expensive and controversial, tool of economic development at the state and local levels. That controversy has focused on the economic impact of IRBs: Whether or not they meet the intended goals of creating jobs and stabilizing the tax base of local communities, and whether the benefits are worth the costs. Though IRBs are often justified, at least in part, as a particularly useful program for older, urban, minority communities, little research has been done on the participation of racial minorities and women in IRB programs. This article examines Chicago's IRB program and finds that minorities have not participated equitably. Racial minorities and women are underutilized in many firms receiving this form of publicly subsidized financial assistance, and minority-owned businesses receive a disproportionately small share of the loans. Policy recommendations are offered to assure equitable participation of racial minorities and women in IRB programs.

Reevaluating the Benefits and Costs of Industrial Revenue Bonds

In a recent article in this journal it was argued that the costs of Industrial Revenue Bonds exceed their benefits and the program, therefore, should be abolished. This note reevaluates the benefits and costs as presented in that article. It is concluded that the costs enumerated in the previous study were overstated whereas the benefits were understated. Among the social costs discussed, only transaction costs and distributional consequences are found to be valid. Absent from the previous study's benefit considerations was the increased capital formation resulting from low-interest Industrial Revenue Bonds.

Rejoinder to Matthew R. Marlin's "Reevaluating the Benefits and Costs of Industrial Revenue Bonds"

Matthew Marlin's analysis does not support his position. Our earlier research of industrial revenue bonds is correct and we continue to argue that the IRB program creates economic inefficiencies, increases the federal deficit, and serves no apparent public purpose. The elimination of the program is in the best interest of the nation.

State, Local, and Federal Economic Development Policies: New Federal Patterns, Chaos, or What?

Federal economic development policies and those of state and local governments are potentially complementary, but they are not necessarily consistent in practice. Increasing emphasis on these policies by state and local government, coupled with potential changes in federal tax and spending strategies, provide considerable potential for conflict. State and local economic development policies have a momentum of their own, but many are dependent on aspects of federal tax and spending policy. Industrial revenue bonds and tax-exempt financing of infrastructure are threatened by potential changes in federal tax law. Local development efforts have depended heavily on financing from federal programs such as community development block grants and urban development action grants-programs potentially threatened by attempts to cut the federal deficit. The Reagan administration's major economic development initiative, enterprise zones, has languished in Congress, but many states have adopted the concept. While federal, state, and local officials will probably continue to clash over some development policies, some interesting possibilities for cooperation exist.

The Statewide Economic Impact of Small-Issue Industrial Revenue Bonds

The Statewide Economic Impact of Small-Issue Industrial Revenue Bonds

The Application of Comprehensive Community Economic Analysis

Community Economic Development in the 1970s might best be characterized by a push for financial incentives aimed at encouraging industrial development and/or the renovation of older city centers. Industrial revenue bonds and their accompanying lower interest rates and federal tax breaks became a part of nearly every state’s incentives package aimed at luring business away from others. Federal grants and loans were combined with private funds to build glittering downtown shopping malls, convention centers, and housing complexes. Local governments were encouraged to organize special taxing districts. These districts used public funds to support private industrial and housing development with the promise of ultimate community fiscal benefit.

An economic analysis of industrial revenue bonds and the demand for labor

In this paper the standard theory of the derived demand for inputs for the firm has been used to examine the effect on employment of a subsidy to the capital input via an industrial revenue bond. While the effect theoretically is ambiguous in sign, an empirical examination of the industrial revenue bond program in Chicago suggests that, ceteris paribus, employment does increase in firms selected for the program. The estimates of the arc crosselasticity of demand for labor for the groups of firms that participated in the Chicago program range from −.27 to −1.07. Systematic variations in the cross elasticity of demand for labor are found.

Buying Bonds for Business

Tax-free Industrial Revenue Bonds (IRBs) have become a very popular method of stimulating economic development among local communities. IRBs impose few direct costs upon the issuing jurisdictions while the perceived benefits, to business people and communities, are substantial. However, important social costs are associated with the use of IRBs: reduced federal tax revenues, dilution of the municipal bond market, legal and administrative expenses, and lowered real national output. A study of the use of IRBs in Ohio between 1974 and 1978 showed that few social benefits were generated to offset the real social costs of the program. IRB investments were not directed toward high unemployment areas, and the jobs they created did not appear to yield disproportionately direct benefits to the low-income segments of the issuing jurisdictions. These findings suggest that the federal government should effectively abolish the IRB program by removing I RBs' tax-exempt status. If this proves politically impossible, then IRBs should be directed instead toward severely distressed areas. This form of targeting is consistent with the role envisioned for IRBs in the Reagan administration's enterprise zone concept.

Should the federal government subsidize industrial pollution control investment?

Tax-exempt financing of industrial pollution control equipment has increased rapidly in recent months. This method of subsidizing pollution abatement is known to be highly inefficient. If tax-exempt industrial revenue bonds were replaced by a more efficient subsidy the net financial benefits to polluting industries could probably be about doubled without any extra cost to American taxpayers. Increased utilization of an inefficient subsidy device and the international energy crisis make this a propitious time for tax experts and economists to re-examine the question, should industrial pollution control investments be subsidized?

A BENEFIT‐COST ANALYSIS OF A REGIONAL DEVELOPMENT INCENTIVE: STATE LOANS*

The luster of economic growth, the existence of depressed regions, and the fear of competition from giveaway programs in other states have all resulted in state governments adopting a rash of programs designed to encourage a strong manufacturing base for their economy.Many economists feel uneasy about the rapid spread of such industrial incentive programs as tax breaks, government loans, and industrial revenue bonds.1 The literature of public finance, development, and regional economics contains many interesting studies examining the wisdom of these undertakings. This paper hopes to contribute by developing a method of benefit‐cost analysis for appraisal of industrial incentive programs. Even though the model is constructed for and applied to the analysis of state government industrial development loans, the principles formulated should be easily adaptable to the assessment of other types of regional development programs.A secondary objective of the paper is to discuss the first empirical application of a model which accounts for possible differences between the social opportunity cost of foregone investment and that of foregone consumption.2

Industrial Revenue Bonds: A Source of Long-Term Financing

In the 1930's and 1940's industrial revenue bonds were little known and seldom used as a method of long-term financing. After gaining some popularity in the early 1950's, chiefly among small industrial companies, the bonds have gained wide acceptance in the past decade and have been issued by some of the largest corporations. These bonds have thus far enjoyed the tax-exempt status of municipal issues; this special feature has recently been the subject of widespread debate. The pros and cons of industrial revenue bonds as related to the experience of one large steel company are offered for guidance.

The Use of Public Credit for Private Business through Bond Issues

IN RECENT YEARS, one of the most active debates in the field of municipal finance has revolved around the question of whether public credit should be used to finance private industry. With the proliferation of inducements offered by states and municipalities to business, what the Federal Reserve Bank of Boston has aptly called the New War Between the States, interest and debate over the proper role of state and local government has sharpened.' Since the 1950's the various kinds of publicly financed inducement plans have constantly expanded, and the gamut of programs now include property tax exemptions, formerly a traditional southern program, but now available in many states; accelerated depreciation for state corporate income tax purposes, and state industrial finance authorities that either guaranty loans made by private lenders or make direct loans of state funds to finance plants. Following New Hampshire's lead in 1955, 19 states have authorized such financial authorities with 15 of them active.2 Furthermore, taxexempt industrial development bonds, which are issued by a local government or its instrumentality to finance facilities which are leased to private operators, have been rapidly growing in use and are now authorized in 26 states and Puerto Rico. It is on the use of these so-called industrial development bonds that this article will focus. While details may vary from state to state, basically industrial development bonds, or industrial revenue bonds as they are often called, represent obligations issued by local governmental units to raise funds for acquiring or improving plants and facilities. The facilities in turn, are leased out to private corporations on a long-term basis, with rental charges under the lease pegged at a rate sufficient to cover debt servicing charges and other costs connected with the bond issue. The securities can be general obligations of the issuer,