Jousting with Rent Seekers: Bruce Davie and Tax-exempt Bonds

 
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Jousting with Rent Seekers: Bruce Davie and Tax–exempt Bonds

         Jousting with Rent Seekers:
     Bruce Davie and Tax–exempt Bonds*

                        Abstract - Bruce Davie was the authority on the economics of
                        state and local bonds whose interest income is excluded from
                        federal income taxation (by section 103 of the Internal Revenue
                        Code). Beginning with his dissertation in 1963 and continuing
                        to his untimely death in 2003, he accumulated vast knowledge
                        about tax–exempt bonds. That knowledge was put to excellent use
                        during his time at the House Ways and Means Committee from
                        1979 through the late 1980s. He played the critical role in writing
                        sections 141 through 150 of the Code, the sections that determine
                        what state and local issuers are permitted to do by section 103.
                        His efforts focused on minimizing the federal subsidy’s economic
                        distortions and maximizing its social benefits.

                        INTRODUCTION

                                            There once was a man from L.A.
                                            Who let nothing stand in the way
                                                  Of foiling those bent
                                                  On seeking out rent
                                            So come. Let us praise him today

                        T    hat little limerick summarizes the role Bruce played in fed-
                             eral tax–exempt bond policy while working at the House
                        Ways and Means Committee and the Treasury’s Office of Tax
                        Analysis. His interest in state and local debt (often referred
                        to as municipal bonds) began with his Harvard dissertation
                        titled “State and Local Government Bond Issues before 1913:
                        A Study of Increased Market Perfection” (Davie, 1963), and
                        that interest continued for the next 40 years.
                           It is no accident that his dissertation analyzed the state
                        and local bond market prior to 1913, for that year marked the
                        end of what Edith Wharton might have called the market’s
Dennis Zimmerman        “age of innocence.” The adoption of the federal income tax
Congressional Budget    in 1914 changed the market forever because the interest in-
Office, Washington,      come earned by purchasers of municipal debt was excluded
D.C. 20515-6925         from the tax base. That treatment of state and local bond
                        interest income was probably motivated more by the
                        legal doctrine of intergovernmental tax immunity than by
National Tax Journal
Vol. LVII, No. 3        * The views expressed in this article are those of the author and should not
September 2004            be interpreted as those of the Congressional Budget Office.

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NATIONAL TAX JOURNAL

economic concerns.1 From an economic                           the subsidy for purposes not originally
perspective, the exemption of state and                        intended, and to receive a larger subsidy
local interest income from the tax base                        than intended.2
meant that the federal government would                          In the tax–exempt bond market, those
pay a substantial portion of state and                         seeking to gain are easily identified.
local governments’ interest costs. That
subsidy would provide an incentive for                          •     Private businesses and individuals
bond market participants to adjust their                              seek access to low–cost debt financ-
behavior.                                                             ing from state and local officials
   The reduction in borrowing costs prob-                             acting as adjuncts to the commercial
ably generated additional state and local                             banking system.
capital formation, a desirable thing if there                   •     State and local officials and their tax-
were reason to believe the state and local                            payers try to earn arbitrage profits,
sector under provides capital facilities                              borrowing at a low tax–exempt rate
across a broad range of its responsibilities.                         and investing the bond proceeds at
That might be the case if a significant share                          high taxable rates.
of the benefits from state and local capital                     •     Underwriters and others involved in
facilities, such as for pollution control,                            the financial production process try
accrue to persons outside the jurisdiction                            to capture some of the value of the
and if the jurisdiction’s taxpayers do not                            tax subsidy both by increasing bond
account for those benefits in determining                              volume and issuance costs.
capital spending. However, the interest
subsidy applies to all capital facilities,                       Bruce labored long and hard advising
even those for which spillover benefits                         the Congress from the late 1970s through
are likely to be minimal.                                      the late 1980s about ways to counter this
   The option of eliminating the exemp-                        behavior. The results of that labor ap-
tion and allowing any federal concern                          pear on page after page of the Internal
with increasing state and local capital                        Revenue Code (the Code) in sections 141
formation to be more carefully targeted                        through 150. Of course, some may argue
using intergovernmental grant policy                           that adding a great deal of complexity
has largely been“off the table.” So Bruce                      to the Code is not much of a legacy, and
did not worry too much about that ideal-                       anybody who has read those sections has
ized world. He focused instead on the                          indeed confronted complexity. It is true
incentive a subsidy provides for rent                          that the social costs of taxation should be
seeking, defined in the Palgrave diction-                       minimized, and compliance costs are an
ary as the socially costly pursuit of wealth                   important component of those costs. But
transfers (Tollison, 1998). People and                         the alternative to those compliance costs
firms invest time and resources trying                          imposed through the efforts of Bruce and
to capture that subsidy, to manipulate                         others is to increase the other component
the legislative process to gain access to                      of the social costs of taxation—distor-

1
    The belief that the Tenth Amendment of the constitution requires the exemption of interest income on state and
    local debt persisted until late in the 20th century when it was rejected by the Supreme Court in South Carolina
    v. Baker (1988). The Court held that the exemption rested on statutory, not constitutional, law and could be
    denied through the legislative process. For a discussion of the issue, see Davie and Zimmerman (1988).
2
    In a literal sense, the efforts of bond market participants are not directed toward establishing monopolies,
    which is the typical context in which rent seeking is analyzed. But participants’ efforts to capture the subsidy
    certainly are socially costly, and I could not devise a substitute term for “rent” that fit neatly into the title or
    the limerick running around in my head. So I exercise some poetic license.

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Jousting with Rent Seekers: Bruce Davie and Tax–exempt Bonds

tions that decrease economic welfare.                investments at higher taxable interest
One might say Bruce’s efforts generated              rates—a financial innovation pioneered in
private costs but public benefits.                    the 1930s by Mississippi.
   This article focuses solely on Bruce’s               Congress first placed restraints on bond
contributions at the Ways and Means Com-             issuance in 1968 when it enacted legislation
mittee. His time at Treasury is ignored, not         to define and restrict the use of tax–exempt
because it was devoid of contributions, but          bonds for business activities deemed to be
because those contributions are obscured             lacking a public purpose. That legislation
or buried within the bureaucracy and were            was a direct attack on the commercial
more of the nature of what he managed to             banking activity of state and local officials,
prevent rather than enact. We had many               although those officials characterized it as
conversations that ensued after I would              economic development activity. In 1969,
read about some ingenious new bond pro-              arbitrage bonds were defined as bonds
posal that appeared in the Bond Buyer (the           for which all or a major portion of the
daily newspaper tracking the public se-              proceeds are used to acquire securities
curities market) or that had been brought            earning a yield materially higher than the
to my attention by congressional staffers.           yield on the tax–exempt bonds, and those
Rare was the instance he had not heard               bonds were declared to be taxable.
about it and already delivered a strong                 By the late 1970s and early 1980s, it
dose of economic perspective to private              was obvious that those few restrictions
users and their promoters at federal de-             were not working. Arbitrage earnings,
partments such as Transportation, Energy,            including those earned through the use
and Housing and Urban Development                    of advanced refunding bonds (a second
(HUD). His success may at times have                 or third bond issue supporting one capital
been less than he wished, as is evidenced            facility without retiring the earlier bond is-
by the whittling away in the last decade of          sues), were being issued more frequently.
some of the controls adopted during the              And the growing use of revenue bonds
1980s, but that was not attributable to any          relative to general obligation bonds sug-
flagging of his efforts.                              gested use of bonds for private purposes
                                                     was growing rapidly. General obligation
                                                     debt pledges the state’s taxing power to
BACKGROUND
                                                     pay debt service, and is the type of debt
   For more than 50 years, the exemption             usually employed to finance public capital
of interest income on state and local debt           facilities. Revenue bonds pay debt service
stood untouched by legislative activity.             with project revenue, not tax revenue, and
State and local officials were free to issue          the absence of liability makes taxpayers
bonds for any purpose, constrained only              less concerned about the use of tax–
by their constituents and state and local            exempt bonds that finance facilities lack-
legal structures. Federal law did not pro-           ing a public purpose. Between 1969 and
hibit a jurisdiction from issuing bonds at           1979, the revenue bond share of total bond
low tax–exempt interest rates, investing             issuance grew from 30 to 70 percent of
the bond proceeds in taxable bonds with              total long–term bond volume. It was obvi-
higher interest rates, and using the yield           ous that state and local use of tax–exempt
differential to finance current services.             bonds was drifting even further from its
Nor did that law prohibit state and local            historical roots than had occurred in the
officials from lending bond proceeds to               19th century’s canal, railroad, and land
private businesses that otherwise would              speculations. Those concerns dovetailed
have to finance the debt portion of their             nicely with congressional interest in fed-

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NATIONAL TAX JOURNAL

eral tax base broadening as a vehicle for                   a two–part test. Bonds were considered
controlling the growing federal budget                      to serve a private purpose and be tax-
deficit in the early 1980s.3 That is the policy              able if more than 25 percent of the bond
environment that prevailed during much                      proceeds were used in a trade or business
of Bruce’s time at the Ways and Means                       (the private use test) and if more than 25
Committee.                                                  percent of the debt service was secured
                                                            by property used in a trade or business
                                                            (the security interest test). It was a good
LEGISLATIVE ACTIVITY
                                                            start, but those criteria did not prevent
   From the late 1970s through 1989,                        huge growth in revenue bond (and private
Bruce was a principal architect of many                     activity) usage.
legislative provisions designed to restrict                    In 1984, the private–use restrictions that
the rent–seeking behavior of the major                      previously applied only to proceeds used
players in the tax–exempt bond market                       in a trade or business were extended to
and focus the federal subsidy of state and                  individuals. Those “consumer loan bonds”
local interest costs on the construction                    (later renamed “private loan bonds”) were
of public capital facilities. Those efforts                 made taxable, and were defined as bond
employed many tools that encompassed                        issues for which more than five percent
market–based manipulation of incen-                         of the bond proceeds were loaned to in-
tives, outright prohibition, redefining                     dividuals. In 1986, the 25 percent private
criteria and exceptions, volume limits,                     use and security interest tests for trade
and improved information.4 The criteria                     and business activity were substantially
defining taxable private use of bonds                       tightened to 10 percent, and all of these
were made more inclusive, the excep-                        bonds were renamed “private–activity
tions that allowed bonds satisfying those                   bonds.”
private–use criteria but still qualifying for
tax exemption were limited, volume caps
                                                            Limiting Tax Exemption for
were imposed on the remaining exempt
                                                            Private Activities
private uses, beneficiaries were targeted
more carefully to achieve social objectives,                   When the criteria for determining
the use of bonds to earn arbitrage profits                   private business activities that would
was limited, access to subsidies for private                not be tax–exempt were adopted in 1968,
investment was denied or limited for the                    Congress decided to allow some activities
portion of private investments financed                      to remain tax–exempt even though they
with tax–exempt bonds, and good govern-                     qualified as taxable. Many activities were
ment provisions were adopted requiring                      included in a list of “exempt facilities” and
state and local officials to provide citizens                allowed to be financed with tax–exempt
more complete information about pro-                        bonds. Additional activities were added
posed bond issues.                                          to the list of exempt facilities in five tax
                                                            acts between 1971 and 1981.
                                                               The effort to scale back bonds issued for
Public Purpose Definition
                                                            those exempt activities began in earnest
  In trying to control private use of tax–                  in the 1982 Act. Small–issue industrial
exempt bonds in 1968, Congress devised                      development bonds (IDBs) were denied

3
    “Congress was concerned with the volume of tax–exempt bonds used for private activities. . . . The increas-
    ing volume of private activity bonds has also caused mounting Federal revenue losses (Joint Committee on
    Taxation, 1982, pp. 98–9).
4
    This legislative history is developed more completely in Zimmerman (1991).

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Jousting with Rent Seekers: Bruce Davie and Tax–exempt Bonds

tax exemption if more than 25 percent of             hotels and retail outlets both inside and
the bond proceeds were used for certain              outside terminals.
types of facilities—automobile sales or                 It should be noted that removing the
service, retail food and beverage service,           exception for these activities did not
or recreation and entertainment—even if              mean they could not be financed with tax–
no more than 25 percent of debt service              exempt bonds. If taxpayers are willing to
was secured by prohibited property. In               finance the activities with general obliga-
addition, no small–issue IDBs could be               tion debt, then the private use test is not
used for golf courses, massage parlors,              violated (less than 10 percent of the bond
hot tubs, and racetracks.                            proceeds are secured by property used in
   The 1984 Act limited the use of small–            a trade or business) and the bonds are not
issue IDBs to manufacturing facilities,              taxable private–activity bonds. Congress
meaning that commercial facilities of                does not restrict the ability of state and
any kind could no longer use tax–exempt              local governments to issue bonds for any
bonds. Ironically, that restriction was              activity if taxpayers are willing to pledge
motivated in part by the use of small–               their tax base as security for the bonds.
issue IDBs to finance shopping plazas                 This became an important issue in the
on the outskirts of many smaller towns               1990s as local governments began to fi-
which many viewed as direct competition              nance professional sports stadiums with
with struggling “main street” shopping               general obligation debt.
districts. The Act also denied small–                   At or near the top of Bruce’s list of
issue IDBs for land acquisition, airplanes,          tax–exempt bond use lacking an economic
skybox or other luxury box, health                   rationale was the municipal electric utility
club or gambling facility, and package               industry. He could see no economic justi-
liquor stores. Restrictions were placed              fication in the late 20th century for public
on student loan bonds. However, when                 provision of electricity—“municipal so-
“consumer loan bonds” were defined as                 cialism” was his term for it. In his view, a
taxable bonds, Congress again decided to             public electric utility’s use of tax–exempt
continue tax exemption for some activi-              bonds simply enabled the utility to reduce
ties that violated the five percent private           its cost of capital and provide community
use test, in particular qualified mortgage            residents with electricity prices subsidized
revenue bonds, veterans’ mortgage                    by federal taxpayers. When Consolidated
bonds, and student loan bonds, activi-               Edison in Chicago was threatened with
ties that had previously been granted the            public takeover of its investor–owned
tax exemption privilege. No additional               electricity facilities financed with tax–
consumer loan bond provisions have                   exempt bonds, the political leverage was
been adopted, so the nation has been                 suddenly available to curtail public pow-
spared the development of state and lo-              er’s use of the tax–exempt bond subsidy.
cal programs such as “automobile loan                The 1987 Act defined tax–exempt bonds
bonds.”                                              to finance the acquisition of investor–
   The 1986 Act imposed many more re-                owned electric utility facilities as taxable
strictions. Bonds issued to build facilities         private–activity bonds. Such bonds would
for sports, convention and trade shows,              only be tax–exempt to the extent they
parking, and private pollution control               were able to receive an allocation from the
were made taxable. The exceptions for                state’s private–activity bond volume cap,
airports, docks and wharves, and mass                an unlikely prospect given the size of most
commuting facilities were narrowed. Use              utility purchases and the intense competi-
of bond proceeds was denied for many of              tion among advocates of exempt private
those activities’ related facilities such as         activities for scarce volume cap.
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NATIONAL TAX JOURNAL

Volume Cap                                          tax–exempt institutions, nonprofits do not
                                                    have to pay federal income tax on the tax-
   Given the generous exceptions to the             able earnings from their endowment funds
private–activity bond rules, another tool           invested in assets such as corporate stock
was needed to contain private–activity              and real estate, and those assets in effect
bond volume—the volume cap. The first                constitute the collateral for the tax–exempt
volume restriction was imposed on mort-             bonds. In effect, their tax–exempt borrow-
gage revenue bonds in 1980. The volume              ing allowed them to earn arbitrage profits
of those bonds issued in a state was lim-           denied to most users of tax–exempt bonds.
ited to the greater of $200 million or nine         The 1986 Act imposed a $150 million cap
percent of the three–year average value of          on a nonprofit organization’s outstanding
mortgages executed within the state for             stock of bonds, with an exception allowed
single–family residences. The concept of            for hospital facilities.
a volume cap was extended to qualified
veterans’ mortgages in 1984, although that
                                                    Targeting Beneficiaries
cap was structured differently.
   The 1984 Act also extended the volume               Absent restrictions on making loans to
cap beyond the housing area. Certain IDBs           private individuals, states began to issue
and student loan bonds were constrained             bonds and use the proceeds to make loans
to the greater of $150 per state resident           for the purchase of owner–occupied hous-
or $200 million. This Act also instituted           ing and the financing of a college educa-
the first cap based upon the outstanding             tion. Tax acts in 1980, 1982, 1984, 1986, and
stock of bonds rather than the annual is-           1988 all included provisions to focus these
suance of bonds. Any one beneficiary’s               mortgage subsidies on those less likely to
use of small–issue IDBs was limited to $40          own homes. The subsidy was restricted to
million at any one time. The 1986 Act re-           mortgages for the financing of principal
duced the volume cap established in 1984            residences and a ceiling was imposed on
to $150 million or $50 per state resident.          the purchase price. Twenty percent of
Previous volume caps had excluded a                 loanable bond proceeds were reserved
variety of private–activity bonds from the          for homes in areas with less than median
cap, but this cap applied to most of those          income. In the 1986 Act, a limit was placed
activities with the exception of nonprofit           on the income of subsidy recipients. The
organizations, governmentally owned                 1988 Act tightened the purchase price and
airports, docks and wharves, solid wasted           income limits to further target the subsidy
disposal facilities, and qualified veterans’         to low and moderate income household.
mortgage bonds (which remained subject                 Bruce was particularly concerned with
to their own cap). Particularly important           the subsidy’s use by single, young people
was the inclusion of mortgage revenue               whose permanent income was markedly
bonds within the cap, for the volume of             higher than their current income that sat-
bonds issued for that activity is large.            isfied the program’s target income rules.
   Another candidate for Bruce’s list of            Evidence for this was the rapidity with
unjustified tax–exempt bond use lacking              which those receiving mortgage assistance
an economic rationale, right up there with          sold their mortgage–bond financed homes
public power, was borrowing by very well            and moved up. A provision to recapture
endowed nonprofit organizations. Al-                the subsidy was adopted in 1988 for
though a graduate of Harvard, it bothered           homes sold within 10 years of purchase by
him that such well endowed institutions             people whose incomes increased substan-
could take advantage of their access to             tially during that time. The recapture was
low–cost federally subsidized capital. As           the lesser of 1.25 percent of the original
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Jousting with Rent Seekers: Bruce Davie and Tax–exempt Bonds

loan balance for each year the loan is out-          and, if appropriate, eventually to all
standing or 50 percent of the gain realized          tax–exempt bonds.
on the sale.                                            The numerous arbitrage restrictions im-
   Several Acts during this time also                posed between 1978 and 1989 frequently
improved the targeting of multifamily                drew a distinction between high–yield-
rental housing bonds to low and moderate             ing securities acquired in the pursuit of
income families. Bonds would be tax–                 the purpose for which the bonds were
exempt only if at least 20 percent of the            issued, so–called “purpose” obligations
units were occupied by low or moderate               such as mortgages and student loans, and
income households, and that target had               so–called “nonpurpose” obligations, such
to be met for a 20–year period. Those                as taxable federal government securities,
provisions were adjusted several times,              that had no relationship to the purpose
and in 1988 were applied to a nonprofit               for which the bonds were issued. The
organization’s acquisition of for–profit              dollar value of bonds earning nonpurpose
residential housing property.                        arbitrage was restricted to 150 percent of
                                                     annual debt service. Use of these earnings
                                                     as a source of general revenue was first
Arbitrage Profits and Advance Refunding
                                                     denied, and eventually subject to rebate
   The general rule about what constitutes           to the federal government. Rebate require-
a “major” portion of a bond issue was                ments in turn were eventually extended
first set at five percent. It allowed five              to all tax–exempt bonds, with an excep-
percent of bond proceeds to be invested              tion provided for construction project
at unrestricted yield without violating the          proceeds of governmental and non–profit
major portion standard that established a            private–activity bonds that spent specified
bond issue’s taxable status. The remain-             proportions of bond proceeds within set
ing 95 percent of bond proceeds could be             time periods from the date of issuance,
invested at the materially restricted yield.         beginning at six months and ending in
The major portion standard was increased             three years. The length of time bonds can
to 15 percent of bond proceeds, and ex-              remain outstanding was restricted to 120
ceptions were made for reserve funds,                percent of the expected life of the facili-
replacement funds, and sinking funds, all            ties being built with all private–activity
of which could be invested at unrestricted           bonds, called the “term–to–maturity”
yields. Advance refunding opportunities              provision.
multiplied the possibilities. Mortgage
revenue bonds and student loan bonds,
                                                     The Private Cost of Capital
whose whole purpose was to borrow
funds and acquire higher–yielding debt                 Another approach to controlling private
instruments in exchange for lending those            business use was to deny the use of tax
funds to home buyers and students, were              benefits intended for private investment
not subject to these restrictions.                   to that portion of assets financed with
   Additional restriction of arbitrage earn-         tax–exempt bonds. Depreciation allow-
ings began in 1978 and used a technique              ances for both equipment and structures
Bruce often employed. A restriction would            historically have reflected a tax life that is
be imposed in exchange for granting                  shorter than the economic life of the asset
exempt status to a particular activity               and a more rapid rate of deterioration
that otherwise satisfies the conditions for           within that life span than is consistent
taxable private–activity bond status. In             with experience. In 1982, the portion of
subsequent years, that restriction would             an asset financed with tax–exempt bonds
be extended to all private–activity bonds,           was forced to take its depreciation deduc-
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NATIONAL TAX JOURNAL

tions at a slower rate. Several types of                    tion on federal guarantee was extended
private activities were exempt from this                    to all tax–exempt bonds, whether private
rule. In 1986, tax–exempt bond financed                      activity or governmental. The definition
equipment was subjected to a longer as-                     of federal guarantee was broadened to
set life and a slower rate of deterioration                 include any financial arrangement that
within that new life, and all exceptions                    transfers risk to the federal government.
to the changed depreciation rules were
eliminated except for multifamily rental
                                                            Good Government Provisions
housing.
   Another technique used to reduce ac-                        A final way to control private activity
cess to both the tax–exempt bond subsidy                    bond volume was to require that state and
and private investment preferences was to                   local officials inform their taxpayers about
impose governmental ownership require-                      all potential bond issues. The theory is that
ments that are tantamount to denying                        a better informed public would force of-
depreciation and investment tax credits on                  ficials to consider the public benefits and
the property. A three–part governmental                     costs of any bond issue as carefully as they
ownership test was adopted in 1986 for                      consider their potential electoral benefits
tax–exempt bond financed property be-                        from providing public subsidies to private
ing leased or operated by a private party.                  businesses and individuals.
The property is governmentally owned if                        In 1980, a registration requirement
the nongovernmental lessee elects not to                    was imposed in exchange for extending
claim depreciation or an investment tax                     tax–exempt status to solid waste disposal
credit, the life of the lease does not exceed               facilities configured to produce steam or
80 percent of the property’s expected eco-                  alcohol, for the first time leaving a paper
nomic life, and any lessee purchase of the                  trail of those receiving interest income.
property is at fair market value.                           Failure to register made the bonds taxable.
   A tax–exempt bond that carries a federal                 That registration requirement was extend-
guarantee can be issued at a lower yield,                   ed to all tax–exempt bonds in 1982.5
in effect lowering the cost of capital. The                    Also in 1982, a public hearing was re-
first instance of restricting the joint use of               quired to discuss the merits of proposed
tax–exempt financing and federal guar-                       IDB issues. Alternatively, the proposed
antee occurred in 1980. The exemption                       bond could be approved by referendum to
for solid waste disposal was extended                       be held at the issuing jurisdiction’s normal
to include facilities used to convert solid                 election time. Officials also were required
waste into steam and alcohol. However,                      to file information reports on those bond
tax exemption was denied if the facilities                  issues to the Treasury Department. Those
received a federal guarantee, directly or                   reports had to identify important charac-
indirectly.                                                 teristics of the issue such as interest rate,
   That was Bruce’s first use of the strategy                amount of proceeds, name of the elected
to impose a new restriction in exchange for                 official or legislative body that approved
granting private–activity bond status to a                  the issue, and the principal users of the
new activity in anticipation of applying the                bond proceeds. In 1984, information–
restriction more broadly in the future. That                reporting requirements were extended to
future arrived in 1984 when the prohibi-                    mortgage revenue bonds, and the issuer

5
    It was this registration requirement that prompted the state of South Carolina to sue, claiming tax exemp-
    tion was protected by the Constitution. The Supreme Court ruled tax exemption was a statutorily granted
    privilege. The history of the registration provision and the Supreme Court decision is discussed in Davie and
    Zimmerman (1988).

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Jousting with Rent Seekers: Bruce Davie and Tax–exempt Bonds

had to file an annual policy statement              He really did apply the full kit bag of
specifying how it intended to comply               economic tools. But I think his interest
with the congressional intent to target            was also sustained because he had such
the bonds to lower–income families. Fi-            a good grasp of economic history. That
nally, in 1986 the taxpayer approval and           predilection toward the long view served
information reporting requirements were            him well when confronting the inevitable
extended to all tax–exempt bonds.                  twists and turns of policy making in the
                                                   U.S. Congress.
                                                     Two years ago, I asked Bruce if he was
SUMMARY                                            considering retirement. Unlike his usual
   Bruce was involved in many economic             protracted pause before responding to
issues over his years in government                virtually any query, his response was im-
that encompassed service with Office               mediate and direct. “No. I am having too
of Management and Budget (OMB), the                much fun.”
House Ways and Means Committee,
and Treasury. Throughout his career,
                                                   REFERENCES
tax–exempt bonds remained a constant
interest. Section 103 that established the         Davie, Bruce.
exclusion of state and local interest from           State and Local Government Bond Issues Before
taxation may be a minor provision of the             1913. Harvard University Dissertation,
Code in dollar terms. But few have left              1963.
as large an imprint on any part of the             Davie, Bruce, and Dennis Zimmerman.
Code as Bruce did on those sections that             “Tax–exempt Bonds after the South Carolina
struggle with defining what is authorized             Decision.” Tax Notes 39 No. 13 (June 27,
by section 103, specifically sections 141             1988): 1573–80.
through 150.                                       U.S. Congress.
   His interest in and enthusiasm for the            Joint Committee on Taxation. General Ex-
policy battles over tax–exempt bonds                 planation of the Revenue Provisions of the Tax
and other issues never waned. Perhaps                Equity and Fiscal Responsibility Act of 1982.
that was because those battles enabled               JCS–38–82, December 31, 1982.
him to apply such a broad spectrum of              Tollison, Robert D.
economic theory to structuring potential             “Rent Seeking.” In The New Palgrave Dic-
solutions. His legislative efforts reveal            tionary of Economics and the Law, edited by
the application of the broad themes of               Peter Newman, 315–22. New York: Stockton
public goods theory to defining public                Press, 1998.
and private goods, efforts to incorpo-             Zimmerman, Dennis.
rate theories about the role of imperfect            The Private Use of Tax–exempt Bonds: Con-
information in economic decisions, and               trolling Public Subsidy of Private Activities.
his knowledge of tax details such as ac-             Washington D.C.: Urban Institute Press,
celerated and economic depreciation.                 1991.

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