CRS EXAMINES SMALL ISSUE IDBs AND MORTGAGE REVENUE BONDS.

CRS 89-370-E

DENNIS ZIMMERMAN SPECIALIST IN PUBLIC FINANCE ECONOMIC DIVISION

June 15, 1989

CONTENTS

LEGISLATIVE HISTORY SMALL-ISSUE IDBs MORTGAGE REVENUE BONDS

POLICY ISSUES CONSTITUTIONAL PROTECTION INVESTMENT, JOB CREATION, AND REVENUE GAINS TARGETING BENEFICIARIES EFFICIENCY IN SUBSIDY PROVISION BUDGETARY CONTROL

EXPIRING TAX-EXEMPT BOND PROVISIONS: SMALL-ISSUE IDBs AND MORTGAGE REVENUE BONDS

SUMMARY

Several policy issues may arise in any discussions concerning extension of State and local authority to issue small-issue tax- exempt bonds and mortgage revenue bonds beyond the sunset date of December 31, 1989.

First, these bonds do not generate investment and employment increases for the Nation, and Federal revenues do not rise in response to their issuance. It may be true that jurisdictions issuing these bonds experience a higher level of investment and employment than they would otherwise enjoy, but these increases are offset by lower levels of investment and employment in other jurisdictions. Thus, benefits to the Nation are dependent upon altering the distribution of investment and employment among jurisdictions.

Second, altering the distribution of this economic activity requires that the Federal Government target the use of these bonds to identifiable locations and socioeconomic groups rather than allow State and local governments unconstrained control of their issuance. Targeting requirements for mortgage revenue bonds and small-issue IDBs have, in fact, become increasingly prevalent. These tax provisions amount to complex spending programs for which the public consumption benefits depend upon channeling the funds to select individuals or firms identified by their nontax characteristics. Is the Internal Revenue Service well adapted to administer such programs, or should they be direct spending programs?

Third, tax-exempt bonds have long been criticized as an inefficient subsidy instrument for providing assistance to State and local governments. The argument was that selling all tax-exempt bonds required purchases by relatively low marginal-tax-rate buyers, who could only be attracted by raising the tax-exempt interest rate. This relatively high interest rate exceeded the rate necessary to attract buyers with high marginal tax rates, thereby providing them with windfall gains and wasting the Federal revenue loss. This criticism is much less relevant now due to the marginal tax rate reductions that occurred in the 1980s. The efficiency of tax-exempt bonds as a subsidy instrument has improved substantially.

Fourth, tax-exempt bonds have also long been criticized for their lack of budgetary control. Prior to the 1980s, the bonds were in effect an open-ended matching grant whose use depended entirely on State and local demand. The advent of the volume cap, now $50 per State resident for private-activity bonds, effectively changed this relationship and established Federal budgetary control. It is not even clear whether allowing small-issue and mortgage revenue bonds to sunset will increase Federal revenue, because the States could substitute other private-activity bonds for these bonds' share of the cap.

TAX-EXEMPT BONDS AND EXPIRING TAX PROVISIONS: SMALL-ISSUE IDBs AND MORTGAGE REVENUE BONDS

The authority of State and local governments to issue tax-exempt small-issue industrial development bonds (IDBs) and mortgage revenue bonds expires on December 31, 1989. Extension of the authority to issue bonds for these activities may be considered during the 10lst Congress. Any decision to extend this authority is likely to consider several issues: the effect of these bonds on investment, employment, and Federal revenue; whether additional targeting provisions can make the bonds better serve a public purpose; whether tax-exempt bonds are the most efficient way to provide subsidies for economic development and housing; and whether the tax-exempt bond is an inferior subsidy instrument for controlling budgetary costs.

This report first describes the legislative history of these two types of private-activity bonds. The policy issues that are likely to be debated when extension is considered are then discussed. Those familiar with the legislation may wish to move directly to the policy discussion beginning on page 6.

LEGISLATIVE HISTORY

The rapid growth of tax-exempt bond volume, the accompanying loss of Federal income tax revenue, and concern over the dearth of public benefits from some activities being financed with the bonds caused the Federal Government to impose restrictions on the ability of State and local governments to issue bonds for some activities. Legislation pertaining to small-issue IDBs is discussed first, followed by legislation pertaining to mortgage revenue bonds.

SMALL-ISSUE IDBs

The Revenue and Expenditure Control Act of 1968 (Public Law 90- 364) represented the first serious effort to restrict bonds for private activities, including what came to be known as small-issue IDBs. A two-part eligibility test was imposed that effectively denied tax exemption to most of the activities in question. Any bond that met a private use test and a security interest test would be taxable. The private use test was satisfied if all or a major part (eventually defined as more than 25 percent) of the bond proceeds was to be used in a trade or business. The security interest test was satisfied if all or a major part (eventually defined as more than 25 percent) of the principal or interest was secured by or derived from property to be used in a trade or business. Bonds passing these two tests were classified as IDBs, and were not eligible for tax exemption. ¹

Imposition of the use of proceeds test would have denied tax exemption to bonds issued for many activities the Congress deemed to serve a substantial public purpose. For this reason, a lengthy list of exceptions to the tests was provided for specific activities. Excepted activities were: (1) residential real property; (2) sports facilities; (3) facilities for a convention or trade show; (4) airports, docks, wharves, mass commuting facilities, parking facilities, or facilities for storage or training directly related to any of the foregoing; (5) sewage or solid waste disposal facilities and facilities for the local furnishing of electric energy, gas, or water; (6) air or water pollution control facilities; and (7) acquisition or development of land for industrial parks.

In addition to these exceptions for specific activities, a bond issue for ANY activity of $1 million or less was excepted if the proceeds were used for the acquisition, construction, or improvement of land or depreciable property. At the election of the issuer, the $1 million limit could be increased to $5 million if the aggregate amount of related capital expenditures made over a six-year period was not expected to exceed $5 million. Unforeseen expenditures of $250,000 could be ignored in determining whether the $5 million limit had been exceeded. These are the bonds that came to be known as small-issue IDBs.

The Revenue Act of 1971 (Public Law 92-178) made minor adjustments to the public purpose definition, including that for small-issue IDBs. The amount of expenditures for unforeseen circumstances to be disregarded in the determination of the $1 million small-issue exception was increased from $250,000 to $1 million.

The Revenue Act of 1978 (Public Law 95-600) continued the liberalization of eligibility for tax exemption. The $5 million limit on six-year capital expenditures for small-issue IDBs was increased to $10 million, and to $20 million for projects in certain economically distressed areas.

The Tax Equity and Fiscal Responsibility Act of 1982 (Public Law 97-248) terminated the small-issue exception for bonds issued after 1986. In addition, it eliminated the use of small-issue IDBs beginning in 1983 if more than 25 percent of the proceeds were used for certain types of facilities -- automobile sales or service, retail food and beverage service (other than grocery stores), or provision of recreation or entertainment. No proceeds of exempt small-issues could be used for such activities as golf courses, massage parlors, hot tubs, and racetracks.

The Deficit Reduction Act of 1984 (Public Law 98-369) continued the definition process. The Act also extended the sunset date on small-issue IDBs for manufacturing facilities to December 31, 1988; it left in place the sunset date of December 31, 1986 for bonds issued to finance nonmanufacturing facilities. Tax exemption was denied in some cases for bonds issued to finance the purchase of existing facilities and nonagricultural land. Tax exemption was also denied for bonds issued to finance any airplane, skybox or other private luxury box, health club facility, any facility primarily used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises. In addition, small-issue IDBs were included in a State volume cap equal to the greater of $150 per capita or $200 million.

The Tax Reform Act of 1986 (Public Law 99-514) changed the limits for the private-use and security interest tests from 25 percent of bond proceeds to 10 percent. In addition, the sunset date for small-issue bonds to finance manufacturing facilities was extended to December 31, 1989. Bonds issued on behalf of first-time farmers were determined to be treated as manufacturing facilities for purposes of the new sunset date. In addition, the State volume cap was reduced to the greater of $50 per capita or $150 million.

MORTGAGE REVENUE BONDS

As interest rates began to rise in the latter part of the 1970s, State and local governments began to issue tax-exempt bonds to finance mortgages for single-family owner-occupied housing. The Mortgage Subsidy Bond Tax Act of 1980, enacted as part of the Budget Reconciliation Act of 1980 (Public Law 94-449), placed various restrictions on "qualified mortgage bonds" to target the funds to first-time moderate and lower income individuals, and to limit the potential for State and local governments to earn arbitrage profits on the mortgages. The legislation also set a December 31, 1983 sunset date for these bonds. ²

A purchase price restriction required that all mortgages provided from bond proceeds be for residences whose cost did not exceed 90 percent (110 percent in targeted economically distressed areas) of the average area purchase price. At least 20 percent of the lendable proceeds had to be made available for mortgages in targeted areas for at least one year. Another requirement prohibited issuance of mortgages to persons having an ownership interest in a principal residence at any time in the three-year period prior to issuance of the bond-financed mortgage.

Two arbitrage limitations were imposed. First, the effective rate of interest on all mortgages from a bond issue could not exceed the yield of the bond issue by more than one percentage point. Second, earnings on nonmortgage investments (that is, earnings from reserve funds usually invested in taxable securities) had to be paid or credited to the mortgagors or paid to the Federal Government, and the amount of nonmortgage investment could not exceed 150 percent of the year's debt service on the bond issue.

Even with these restrictions, it was suspected that the volume of bonds issued would be very large. As a result, the annual volume of qualified mortgage bonds issued in a State was limited to the greater of $200 million or nine percent of the average annual value of single-family mortgages originated in the State in the preceding three years.

The 1982 tax act, in reaction to the distressed state of the housing market during the recession, relaxed some of these restrictions. The three-year non-ownership requirement was changed to apply to 90 (rather than 100) percent of the mortgages financed with bond proceeds. The purchase price limitation was increased from 90 percent (110 percent in targeted areas) to 110 percent (120 percent in targeted areas). And the spread between the effective interest rate on the mortgage and the yield on the tax-exempt bond issue was increased from 1.0 to 1.125 percent.

The 1984 act extended the sunset date for mortgage revenue bonds to December 31, 1987. Governments were also allowed to exchange all or a portion of their mortgage revenue bond volume for authority to issue one-fifth the volume of mortgage credit certificates. These certificates enable homebuyers to receive nonrefundable income tax credits for a specified percentage of their mortgage interest payments. Eligibility is subject to the same requirements as for mortgage revenue bonds.

The 1986 act extended the sunset date for mortgage revenue bonds and mortgage credit certificates to December 31, 1988. The three-year non-ownership restriction was amended to apply to 95 percent of the mortgages financed with the net proceeds. The purchase price restriction was returned to its original 90 percent and 110 percent of average area purchase price. The rate at which mortgage credit certificates could be substituted for bond volume was raised from 20 to 25 percent -- a dollar of credits for every four dollars of bond volume. The volume limitation for mortgage revenue bonds was eliminated, and the bonds were placed under the State volume cap for private activity bonds, which was set beginning in 1988 at the greater of $50 per capita or $150 million. This of course represented a considerable reduction in the likely volume of mortgage revenue bonds, as they would now have to compete with the remainder of "private activities" for the allowable -bond volume.

An income limitation was imposed for the first time. The income of mortgage recipients could not exceed 115 percent of the higher of (1) median family income for the area in which the residence is located, or (2) the Statewide median family income. In targeted areas, two-thirds of the mortgage financing must be provided for those whose family income does not exceed 140 percent of the higher of median family income for the area in which the residence is located or the Statewide family income. The remaining one-third of mortgage financing may be used without regard to income limitations.

The Technical and Miscellaneous Revenue Act of 1988 (P.L. 100- 647) made a concerted effort to deal with the targeting and arbitrage aspects of mortgage revenue bonds. The purchase price and income limits were tightened in order to deal with what were considered to be two undesirable aspects of the program's operation. First, an unacceptably large proportion of participants was single, young, and had an expected lifetime income profile that was markedly higher than the current income eligibility standard. Second, no provision was made for recapture of the subsidy when these purchasers' increasing incomes caused them to sell their houses in order to buy up (purchase more expensive homes). These facts suggested that the bonds were being used to subsidize citizens who did not really belong to the targeted group of lower income citizens. ³

Income limits were revised and a recapture provision created to deal with these problems. An adjustment was made to the income limit in those areas where housing costs are high relative to national standards. The income limit (absent an area cost adjustment) was changed to the higher of 115 percent of area median income, the adjusted median income limit for a high housing cost area, or 115 percent of State median income.

A recapture rule was adopted for loans made after December 31, 1990. Recapture applies to dispositions of assisted housing which occur within ten years of purchase by people whose incomes have increased substantially since purchase of the home. The amount recaptured is the lesser of 1.25 percent of the original loan balance for each year the loan is outstanding or 50 percent of the gain realized on the disposition.

Prior to 1988, issuers of mortgage revenue bonds were able to retain arbitrage profits earned on nonpurpose investments (investments in assets other than mortgages). In addition, those profits could be used to further lower the financing costs of assisted homebuyers. This was virtually unique treatment for an activity financed with tax-exempt bonds, since most nonpurpose investments are prohibited or must be rebated to the Treasury. The 1988 Act requires arbitrage profits earned on nonpurpose investments to be rebated to the Treasury. In addition, any proceeds not used to finance mortgages within three years of issuance must be used to redeem outstanding bonds.

POLICY ISSUES

Before turning to the four major issues likely to be debated in any effort to extend tax exemption for small-issue IDBs and mortgage revenue bonds, it is useful to review briefly the longstanding claim that all State and local debt is constitutionally protected against Federal income taxation.

CONSTITUTIONAL PROTECTION

As the legislative history in the preceding section makes clear, Congress has been attempting for twenty years to restrict the ability of State and local governments to issue tax-exempt bonds for private activities. ⁴ These changes were enacted over the substantial opposition of State and local officials and the municipal bond industry, opposition which eventually resulted in legal challenges to the constitutionality of major parts of the legislation. The right of Congress to deny tax exemption for State and local debt obligations was upheld subsequently by the Supreme Court in South Carolina v. Baker (56 USLW 4311 (April 20, 1988)). ⁵ The Court held that there is no constitutional barrier to the imposition of Federal income taxes on interest received by holders of State and local government obligations.

With the tax exemption for interest income on State and local debt firmly established as a privilege rather than a right of State and local governments, Congress may make adjustments as it sees fit to some of the tax-exempt bond provisions enacted in previous years. This does not mean that the Supreme Court decision has been accepted by all as the final word. ⁶ Indeed, many State and local officials, bond industry participants, and some Members of Congress are contemplating an effort to adopt a constitutional amendment to establish the tax-exempt status of all State and local debt. Given the complexities of proposing and adopting amendments to the Constitution, it seems likely that for the foreseeable future the Congress will retain the ability to tax the interest on those bonds it considers to represent abuses of congressional intent.

INVESTMENT, JOB CREATION, AND REVENUE GAINS

State and local officials clearly see private-activity bonds as beneficial. At one level, they maintain that these bonds increase aggregate investment and Federal tax revenues, and are therefore beneficial national investments. However, even if aggregate investment and Federal tax revenues do not increase, State and local government officials see the bond proceeds as generating increased investment and jobs in the community, thereby expanding the State and local tax base. At a second level, therefore, the question is whether these officials' perception of "benefits" overstates the gains to society.

Let us begin with the contention that private-activity bonds increase aggregate investment and employment. The ability of private- activity revenue bonds to stimulate investment, employment, and tax revenues depends to a significant extent upon the responsiveness of savers to an increase in the interest rate. ⁷ Suppose savings are not responsive to a change in the interest rate. Then, private- activity revenue bonds can be expected simply to reallocate investment among alternative uses. It may be true, as some contend, that these bonds generate Federal tax revenues and employment. But it is also true that Federal revenues and employment decline in those areas from which investment is displaced by the bonds. The net change is likely to be close to zero.

Alternatively, suppose savings are responsive to a change in the interest rate. In this case, small-issue IDBs and mortgage revenue bonds can stimulate investment and increase tax revenues, but so can numerous other investment subsidy programs. There is nothing unique about the stimulation properties of these private-activity revenue bonds. Utilizing a different investment stimulus program to achieve a macroeconomic goal makes no appreciable difference to the level of the Federal budget and the economy. ⁸

Thus, from an aggregate perspective, whether or not small-issue IDBs and mortgage revenue bonds stimulate investment and generate Federal tax revenues is not important to an evaluation of the bonds. Any effect they have on investment and Federal revenues could have been provided by other means. In effect, the aggregate dollar value of outlays, revenues, and the deficit is a macroeconomic question. State and local officials' valuation of the national benefits of private-activity revenue bonds are overstated from a national perspective because this valuation assumes these increases in aggregate investment and Federal revenue are unique to IDBs.

Now turn to the contention that the choice of private-activity revenue bonds as the instrument for investment stimulus makes a difference to State and local governments. It is possible that those jurisdictions that use the bonds succeed in generating more taxable economic activity than they would have received if, for example, liberalized depreciation rules were utilized to stimulate investment. This may be true, but the point is that the gains registered by these jurisdictions likely come at the expense of equivalent losses of economic activity in other jurisdictions.

What the search for "benefits" seems to come down to is that the distribution of investment and employment by location or socioeconomic group is affected. Unless this distributional effect is articulated by the Federal Government as a policy goal, however, one is hard pressed to see distributional changes as a "benefit" to society.

In addition, even if a distributional goal is articulated, it cannot be achieved if the subsidy is available for individuals and firms without regard to location or socioeconomic group served. In such circumstances, no tax-induced capital cost differential exists and location choices are based on other factors.

TARGETING BENEFICIARIES

The fact that an activity may merit public support at the State or local level, by which we mean it provides adequate benefits to State or local taxpayers to be worth the cost, does not necessarily mean that it provides sufficient benefits to Federal taxpayers to merit Federal subsidy of the State or local effort. It depends upon the extent to which the benefits from the activity "spill out" of the State or local jurisdiction to be enjoyed by Federal taxpayers.

The reason the Congress has classified some activities as private is that, in its judgment, too few of the benefits from the State or local spending accrue to Federal taxpayers living outside the jurisdiction issuing the bonds. One obvious solution to this difficulty is for the Congress to target the use of tax-exempt bond proceeds for these activities to those groups that represent broader Federal interests.

In fact, as the legislative history makes clear, Congress turned to targeting when the mortgage revenue bond program first came under attack. Many of the targeting provisions adopted by Congress over the years were proposed originally by the Congressional Budget Office, which examined mortgage revenue bonds prior to enactment of the Mortgage Subsidy Bond Tax Act of 1980. ⁹

The imposition of income and purchase-price limitations on mortgage recipients in order to target the benefits to lower-income persons represents an effort to make the program more and more like transfer programs -- programs that are generally considered to be a national responsibility. This targeting is further enhanced by the recently adopted recapture provision. Economists might say this recapture provision represents an effort to keep program benefits away from those whose current incomes are low but whose permanent (lifetime) incomes are high and to target benefits to those whose current and permanent incomes are low. In any event, its effect will be to require any lower income mortgage recipient whose fortunes improve to use some of that improved fortune to return the subsidy to the program for the benefit of others. And the arbitrage restrictions remove any temptation to use the program to earn revenues to contribute to the State or local general fund.

Likewise, the efforts to limit the use of small-issue IDBs to manufacturing facilities and to restrict the aggregate amount of capital spending for IDB-financed projects also represents efforts at targeting.

The emphasis on targeting to make the benefits to the Federal taxpayer worth the cost to the Federal taxpayer raises a few interesting questions. First, is the program now sufficiently targeted to lower income persons or to small manufacturing projects to provide the Federal taxpayer with a net benefit? Since we cannot measure the Federal taxpayers' benefits, the question is at one level unanswerable; but in another sense, a congressional decision to extend the provisions beyond 1989 would suggest that targeting is now considered to be adequate.

Second, if this degree of targeting is necessary to make a tax provision serve its public purpose, should it instead be conducted as a spending program? Is the Internal Revenue Service well adapted to act as the administrator of what amounts to a complex spending program for which the public consumption benefits depend upon channeling the funds to select individuals or firms identified by their nontax characteristics?

The first step in enforcement of these targeting provisions depends upon the interpretation of the law by private bond counsel, not Treasury or Internal Revenue Service legal staff. Bond counsel must render an opinion certifying that a proposed bond issue meets the requirements of the tax law. If this "opinion" proves to be incorrect, the bonds issued based on the opinion can be declared to be taxable, and bondholders required to pay income taxes retroactively. This has never been done.

Of course, the fact that the bond prospectus and financial plans that bond counsel relies upon for its opinion are in order at the time of issuance is no guarantee that the State or local government will actually spend the bond proceeds in a fashion consistent with these plans. There must be oversight. Is there a report that must be filed on the use of the proceeds for each bond issue? And does the IRS audit these reports for compliance?

The more one looks at the reality of ensuring that targeting provisions in the tax code are actually followed, the more one must ask whether the necessary work might be better performed by an agency that is experienced in the job of disbursing money rather than collecting it. In fact, in at least two instances the Congress has placed administration of tax subsidies in spending-oriented departments rather than the IRS. The Department of Labor has an appropriation to administer the targeted jobs tax credit, and the Department of Interior has an appropriation to administer the rehabilitation tax credit for historic structures.

EFFICIENCY IN SUBSIDY PROVISION

Even when the project being financed satisfies the public benefits criteria discussed above, objections have been raised that tax-exempt bonds are still inefficient in the sense of being a high- cost subsidy. ¹⁰ With the individual marginal tax rate structure ranging up to 70 percent prior to the 1980s, it could be demonstrated that the revenue loss to the Federal Government was considerably larger than the interest savings to the user of bond proceeds. The combination of a sharply progressive income tax rate structure and the growing volume of bonds issued as State and local governments found new ways to transfer the benefits of bond financing to private firms and individuals caused bonds to be sold to buyers in lower and lower tax brackets. Bond holders in tax brackets higher than that which equated the risk-adjusted yield on the tax-exempts to the aftertax yield on taxables received windfall returns (yields higher than necessary to induce them to buy the bonds). The revenue losses from these "windfall" yields were, in effect, wasted.

This inefficiency is much less pronounced today because the tax reforms of the 1980s have reduced the top effective marginal tax rate for individuals from 70 to 33 percent. This flatter marginal rate schedule implies a much smaller difference between the marginal tax rate of the taxpayer who purchases the market-clearing tax-exempt bond (which determines the tax-exempt bond yield) and the higher marginal tax rates of other bond purchasers. This means that the nonmarket-clearing purchasers receive smaller windfall profits, and a greater portion of the Federal revenue loss is received by State and local governments in the form of interest rate reductions.

BUDGETARY CONTROL

The earlier discussion suggests there is a priority justification for denying Federal financial support for every dollar of public service provided by State and local governments because many of these services provide minimal or no benefits to Federal taxpayers. If this is the case, the exclusion of interest income on State and local bonds from Federal income tax is a poor choice of subsidy instrument. It leaves the decision about what services and how much of these services to federally subsidize in the hands of State and local officials. In effect, it is the equivalent of an open-ended matching grant for the entire spectrum of State and local services. The Federal Government loses its ability to control its budget (defined as the sum of its direct expenditures and the tax revenues foregone from preferential treatment of some sources and uses of income).

This situation is similar to the provision that allows for the deduction of State and local taxes when calculating the Federal individual income tax base. But from a fiscal standpoint it is decidedly inferior to such subsidy choices as closed-ended matching grants and block grants, with which an upper bound on Federal spending forces State and local officials to make hard choices among competing services. These alternative subsidy instruments may not force State and local governments to choose the projects that provide the highest benefit to Federal taxpayers, but they do limit the cost.

The absence of budgetary control was addressed in 1986 when a closed-ended matching grant system was imposed on almost all tax- exempt IDBs, which were renamed private-activity bonds. A $50 per resident cap was imposed on each State's volume of tax-exempt private-activity bonds, including mortgage revenue bonds and small- issue IDBs. The only exceptions to inclusion under this cap were bonds for nonprofit organizations and governmentally owned airports, docks, wharves, and solid waste disposal facilities.

The cap may have another, perhaps unintended, effect. A decision to allow these bonds to sunset may have no revenue consequences for the Federal Government. It is possible that most States would assign the portion of the cap previously allocated to small-issue IDBs and mortgage revenue bonds to other private activities still eligible for tax-exempt financing. To ensure a revenue gain it would be necessary to lower each State's volume cap to refLect the decreased small-issue and mortgage revenue bond volume. Because of data lags and the existence of issuance authority that existed prior to the 1986 cap, little information is available about how binding the cap is in most States.

² Tax treatment differs slightly for the relatively small volume of bonds issued by several States for veterans' mortgages. This report does not describe the legislative changes for these bonds.

³ Two recent studies have evaluated various aspects of the mortgage revenue bond program and come to different conclusions about its usefulness for Federal policy purposes: Wrightson, Margaret. Who Benefits from Single-Family Housing Bonds?: History, Development and Current Experience of State-Administered Mortgage Revenue Bond Programs. Georgetown University Public Policy Program. April 28, 1988; and U.S. General Accounting Office. Home Ownership: Mortgage Bond Are Costly and Provide Little Assistance to Those in Need. GAO/RCED-88-111, March 1988.

⁴ For a discussion of the specifics of these legislative efforts, see U.S. Library of Congress. Congressional Research Service. Tax-Exempt Bonds and Twenty Years of Tax Reform: Controlling Public Subsidy of Private Activities. Report No. 87-922 E, by Dennis Zimmerman. November 23, 1987, 28 p.

⁵ For a discussion of the case and its implications for tax- exempt bond policy, see Davie, Bruce and Dennis Zimmerman. Tax-Exempt Bonds After the South Carolina Decision. Tax Notes. June 27, 1988. pp. 1573-1580.

⁶ See Trujillo, Patricia A. Municipal Bond Financing After South Carolina v. Baker and the Tax Reform Act of 1988: Can State Sovereignty Reemerge? Tax Lawyer, Vol. 42, No, 1, 1989.

⁷ The sensitivity of savings to the interest rate is a matter of considerable discussion. Most evidence seems to suggest savings are not very sensitive to interest rate changes, although some estimates do suggest a positive relationship that is significant. Some observers have suggested that, given the uncertainty surrounding this relationship, the most certain method of raising national savings is not through tax policy, but through raising government savings (reducing the deficit). See: vonFurstenburg, George M., and Burton C. Malkiel. The Government and Capital Formation, A Survey of Recent Issues. Journal of Economic Literature. September 1977; and Howry, E. Philip and Saul H. Hymans. The Measurement and Determination of Loanable-Funds Saving. In Pechman, Joseph A. ed. What Should Be Taxed: Income or Expenditure? Washington, D.C.: Brookings Institution, 1980.

⁸ This Federal budgetary posture argument is not strictly true. Different sources of revenue and different spending programs will produce different incentives for business and individuals. Different incentives generate different responses in terms of altered economic decisions. The allocation of resources will differ, and output, employment, and revenues may differ. However, these "output" effects are sufficiently obscure that they are largely ignored in the budgetary process.

⁹ U.S. Congressional Budget Office. Tax-Exempt Bonds for Single-Family Housing. Prepared for U.S. House of Representatives, Committee on Banking, Finance and Urban Affairs. 1979.

¹⁰ For a recent expression of this sentiment, see U.S. Joint Committee on Taxation. Tax Reform Proposals: Tax Treatment of State and Local Government Bonds, Joint Committee Print, July 16, 1985. p. 50-51.