The last time the nation's tax code was overhauled, in 1986, Congress tried to end a big corporate giveaway.

But this valuable perk – the ability to finance a variety of business projects cheaply with bonds that are exempt from federal taxes – has not only endured, it has grown, in what amounts to a stealth subsidy for private enterprise.

A winery in North Carolina, a golf resort in Puerto Rico and a Corvette museum in Kentucky, as well as Barclays Center in Brooklyn and the offices of both the Goldman Sachs Group and Bank of America Tower in New York – all of these projects, and many more, have been built using the tax-exempt bonds that are more conventionally used by cities and states to pay for roads, bridges and schools.

In all, more than $65 billion of these bonds have been issued by state and local governments on behalf of corporations since 2003, according to an analysis of Bloomberg bond data by the New York Times. During that period, the single biggest beneficiary of such securities was the Chevron Corp., which last year reported a profit of $26 billion.

At a time when Washington is rent by the politics of taxes and deficits, select companies are enjoying a tax break normally reserved for public works. This style of financing, called "qualified private activity bonds," saves businesses money, because they can borrow at relatively low interest rates. But those savings come at the expense of American taxpayers, because the interest paid to bondholders is exempt from taxes. What is more, the projects are often structured so companies can avoid paying state sales taxes on new equipment and, at times, avoid local property taxes.

Budget analysts say these bonds amount to a government subsidy, in the form of forgone tax revenue. While it is difficult to calculate the precise dollar amount of the subsidy, given the number and variety of these bonds, experts say the annual cost to federal taxpayers could run into the billions.

"The federal government doesn't cut a check for this, but it costs the government in terms of lower tax revenue," said Lisa Washburn, a managing director at Municipal Market Advisors, an independent municipal research firm in Concord, Mass., that assisted the Times with its analysis. "If these companies were to issue taxable bonds instead, then the federal government would receive tax revenues on them." Washburn added that the gain to companies, and bond buyers, can be big and long-lasting.

Chevron used most of its federally tax-free borrowings to expand a refinery in Pascagoula, Miss. Archer Daniels Midland, the agribusiness giant, used about $180 million in tax-exempt bonds to improve its grain-processing facilities in Indiana and Iowa.

Such financing arrangements are now worrying some state and local officials. Many are concerned that the budget battles in Washington will mean less federal money for them, and that the federal government might try to limit the scope of their own tax-free financing.

Some of the subsidized business projects are almost indistinguishable from public works.

American Airlines, for instance, another big user of tax-exempt bonds, used $1.3 billion of these securities to finance a new terminal at Kennedy International Airport. That terminal is owned by the city of New York; American is the builder, the borrower and a tenant.

As political controversy over the federal deficit has mounted, some fiscal experts have taken aim at this sort of tax-exempt borrowing. The team at the Bipartisan Policy Center led by Alice Rivlin, a former member of the Federal Reserve, and Pete Domenici, the former Republican senator, has called for ending it. A spokeswoman for the center said that such a change could bring in $50 billion for the federal government over 10 years.

The Obama administration would take a different approach, capping the value of the tax break that wealthy bond buyers enjoy, whether they buy private activity bonds or conventional municipal bonds. Some of the bonds in the Times analysis are subject to the alternative minimum tax, but taxpayers who incur the AMT typically don't buy those bonds.

In 1986, in a sweeping tax reform signed by President Ronald Reagan, Congress set limits on private activity bonds, giving each state a yearly allotment. Some projects, such as airports and wharves, were not subject to the yearly limits. Others could not be financed with tax-exempt bonds at all, including golf courses, stadiums, hotels, massage parlors and tanning salons.

But over time, Reagan-era concerns about budget deficits faded, and so did some of the limits on tax-exempt private activity bonds.

© Copyright The Sacramento Bee. All rights reserved.

Order Reprint