Secrets & Discrimination? Stimulus Bonds Move Covert Projects Forward
Updated January 20, 2010
North Carolina local governments took advantage of the federal government's December 15, 2009 deadline to apply for $1.025 billion in federally subsidized bonding authority under the stimulus plan's Build America bonds program.
Among the first to jump in – Charlotte & Mecklenburg County, which are considering the allocation of up to $57 million in Recovery Zone Facility bonds to lure a “secret” industrial prospect, rumored to be Siemens, the German giant. How the project could possibly be eligible under the purportedly “transparent” stimulus program isn’t explained.
There are two kinds of stimulus bonds:
Recovery Zone Facility Bonds are super-versions of the old industrial revenue bonds which allow certain private companies to issue tax exempt bonds with lower interest rates because investors don’t pay tax on the interest. However, the industrial revenue bonds are subject to the Alternative Minimum Tax, making them unattractive for many. Recovery Zone Facility bonds, however, are AMT exempt – and they’re bank qualified. Banks can deduct the interest they pay on deposits, reducing their taxes while using their deposits to buy tax exempt bonds so that the Goldman Sachs’ of the world can save even more on taxes.
Long time observers will recognize this maneuver as a bank tax loophole that NC Policy Watch’s Chris Fitzsimon has complained about for years.
While the industrial revenue bonds can only be used for industrial plants, Recovery Zone Facility bonds are good for almost anything from factories to shopping centers, restaurants and hotels (economic stimulation must not be the sole goal of Congress, however, since liquor stores, race tracks and massage parlors aren’t eligible for the program).
Economic Development Bonds create an obligation for local government development authorities, not private companies. They can be used for a variety of infrastructure improvements to support development. Economic Development Bonds pay taxable interest, but they’re subsidized by Washington (and consequently, the taxpayers) since buyers accept lower interest rates because they also get tax credits. And since they aren’t General Obligation bonds, politicians don’t need to worry about getting the approval of those pesky voters for the additional debt.
Nationally, the stimulus directs that $25 billion in bonds can be issued, with bonding amounts assigned to local governments based on the localities’ rates of job loss during the recession. Thereafter, the location of recovery zones within a city or county is up to the local governments.
Compared to some of the government’s current stimulus spending choices, like the funding of research to study the sex lives of college women, recovery bonds make more sense. In the case of facility bonds, they do require borrowers to take on risk to get access to the government-subsidized interest rates. But isn’t cheap credit how we got into this mess in the first place?
Additionally, like any government subsidy, economic development bonds are inherently discriminatory – and in North Carolina, they will come at a prohibitively high price, since they include a mandate that all construction must be conducted using Davis-Bacon Act wage standards, which will result in higher labor costs for bonded projects.
The Wall Street Journal demolished the economic models backing stimulus jobs claims with simple logic. “More relevant to the real world, this modeling is single-entry economic bookkeeping. No one ever doubted that the stimulus spree would create or "save" some jobs, but the problem is that the money comes out of the private sector in the form of higher taxes or borrowing. If $1 is devoted to transfer payments — such as jobless benefits or Medicaid like so much of the stimulus — then a $1 net gain in economic growth will register in the GDP accounts. But that $1 has to come from someone or some business in the private economy that might have put it to more productive, job-creating uses.
Economists describe this as a "substitution" effect. "These new jobs that aren't created don't get picked up in Bernstein-CBO econometric models, but their loss leaves the economy less prosperous overall. What can be measured with greater, if not perfect, accuracy is how many new jobs are being created across the economy – and how many people want to work, but can't find a job" (WSJ 12/3/09).
On those counts, the stimulus program has been an horrific bust, and the application of these bonds only serves to dig a deeper hole for future taxpayers to fill in. After all, somebody has to foot the bill – and even in Washington, money doesn’t grow on trees.
For more on this issue, see the Good Jobs First January 2010 report "Bonds & the Recovery Act," which focuses on accountability.
