WASHINGTON -- The tax exemption for small-issue industrial development bonds is a useful incentive for economic growth, particularly in states hit hard by the recession, and should be given a long-term extension, a study by a congressional caucus asserts.

"Tax-exempt IDBs have proven valuable to state and local economic recovery and growth efforts, and their availability should be extended," states a report by the Northeast-Midwest Institute, the research arm of the Northeast-Midwest Congressional Coalition. The report, titled "Industrial Development Bonds: Maintaining an Incentive for Regional Recovery," was released last month.

Authority to issue tax-exempt small-issue IDBs has been extended temporarily three times in as many years, including last month, when Congress extended use of the bonds for just six months through June 30, 1992.

However, Congress's top tax writer, Rep. Dan Rostenkowski, D-Ill., has vowed to end temporary extensios of that and other tax breaks. Rep. Rostenkowski, chairman of the House Ways and Means Committee, plans an examination of the expiring provisions next year with an eye toward deciding which ones should be made permanent and which should die.

The report states that its analysis shows "small-issue IDBs are the only remaining federal economic development incentive targeted solely to manufacturing, a sector in which recovery is vital to broad national economic resurgence."

IDBs have proven "to be an important tool for filling critical financing gaps, especially those faced by small and mid-sized operations," the institute said. "While the 1986 act severely curtailed the use of tax-exempt bonds, IDBs have remained an important source of funding for economic development activities at the state and local level."

For its report, the institute interviewed members of Congress and analyzed bond volume data from the Treasury Department and figures published by the Advisory Commission on Intergovernmental Relations.

Southern states have traditionally issued the bulk of small-issue IDBs, and that trend strengthened during the last five years, the institute found. In 1990, the South issued 39.1% of total IDB volume, compared with 29.2% in 1985.

One other region, the Middle West, also saw a rise in its share of IDB volume over the same period, to 31.6% in 1990 from 25.6% in 1985. The West issued 14.6% of total IDB volume in 1990, down slightly from 15.9% in 1985, while the Mid-Atlantic states issued 11.7%, down sharply from 22.1% in 1985. The Northeast issued 3% of total IDB volume in 1990, down from 7.2% five years earlier.

The report also criticized Congress's practice of granting only short-term extensions to the IDB exemption and said a long-term extension of the authority to issue the bonds is needed.

"The practice of extending the program for short terms as it nears the end has produced a great measure of uncertainty," the report says. "State and local governments are not able to make long-term plans for manufacturing modernization or development projects without some certainty of continuation."

Under congressional rules, caucuses simply are groups of lawmakers who unite because they share an interest in a particular issue. They have existed since the 1950s, but recently their reputation as useful repositories of information has been tarnished by a proliferation of groups that do little substantive work.

The Northeast-Midwest caucus, however, is one of a handful that have been able to establish themselves as important resources for members of Congress trying to learn about a particular issue. The 15-year-old group does research, organizes letter-writing campaigns, monitors legislation, and is generally held in high regard, municipal lobbyists have said.

"The fact that a caucus as well respected as the Northeast-Midwest Coalition has taken an active interest in IDBs suggests that the members of Congress in both parties from that region recognize the critical role that IDB financing must play in promoting the growth of the manufacturing sector in the Northeast and Midwest and by extension, in other portions of the country as well," said Guy Land, a lobbyist for the Council of Industrial Development Bond Issuers.

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