Buying Bonds for Business

Abstract

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.