As readers of this blog will know, one of my pet peeves is the lack of awareness of intangibles in many of our economic polices and programs. An example I often cite is the long standing issue of the inclusion/exclusion of intangibles in the Qualified Small Issue Manufacturing Bonds program (aka Industrial Development Bonds – IBDs). As I have noted in a number of earlier postings, only traditional factories are eligible for low cost financing under this program. The 2009 stimulus bill included a minor change to allow the use of these bonds to finance facilities manufacturing intangible property. The change allowed local government to support new facilities for software development or bio-tech research facilities, for example, as well. But that provision expired at the end of 2010 and was not included in any tax extenders legislation. This simply act of putting physical and intangible investments on the same footing was forgotten and ignored.
However, new legislation was introduced in the House of Representatives just before the August recess to remedy that situation. The bill, Modernizing American Manufacturing Bonds Act (H.R. 5319), would make four changes to the Qualified Small Issue Manufacturing Bonds program, one of which deals with the intangibles issue. As a briefing paper by the Council of Development Finance Agencies (CDFA) explains:
Expanding the Definition of Manufacturing to Include both Tangible and Intangible Manufacturing Production for Qualified Small Issue Manufacturing Bonds
Qualified Small Issue Manufacturing Bonds are the bedrock financing tool for small- to mid-sized manufacturers. This financing tool has been providing affordable capital to our nation’s most important industry for over three decades. Current federal law defines a “manufacturing facility” as one that produces tangible property. However, manufacturing processes, production, and technology have changed significantly since this definition was established. Today’s manufacturers encompass more modern, high-tech, and intangible manufacturing practices such as bio-technology, energy generation, food processing, software, design and formula development, and intellectual property. In relationship to Qualified Small Issue Manufacturing Bonds (commonly known as Industrial Development Bonds or IDBs), the current definition as outlined in the tax code reflects an old philosophy and outdated approach to manufacturing. This outdated definition of manufacturing has resulted in the increasingly limited use of this job-generating economic development tool.
CDFA proposes updating the definition of manufacturing as it relates to Qualified Small Issue Manufacturing Bonds to allow for companies who produce both tangible and intangible property to access the capital markets. The measure would broaden the definition to include facilities that manufacture, create, or produce intangible property. The expanded definition would be sufficiently broad to cover software, patents, copyrights, formulas, processes, designs, patterns, know-how, format, and similar intellectual property. Under this new definition, knowledge-based businesses could access low-cost, tax-exempt IDB financing. This updated definition would align the growing high-tech manufacturing sector with the tools necessary to finance industry growth and expansion. This change will make an immediate difference throughout the country to help retain and create jobs, spur manufacturing investment, and accelerate the nation’s economy.
It is unclear what will happen to the legislation once Congress returns from recess. The proposal could once again be brushed aside as a minor point in a larger tax bill. And of course the future of any tax bill is itself very cloudy. At least CDFA is to be commended for continuing to raise the point. Maybe someday our lawmakers might just get it.
UPDATE: CDFA’s August 19 webcast on the legislation is now available online.