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A development tool designed to aid small manufacturers is scheduled by Congress for elimination at the end of this year, and industrial development agencies across the country are mounting a campaign to save it.

The tool is known as the federally tax-exempt industrial revenue bond. The bonds are issued by industrial development agencies to companies, which then sell them to banks to finance projects. Since the interest on the bonds is tax-exempt, banks can offer funds to companies at lower rates.

"Without tax-exempt bonds, we have a gap" in the arsenal of development aids, said Richard T. Swist, executive director of the Erie County Industrial Development Agency, in a meeting with editors of The Buffalo News. Swist also is president of the Council of Industrial Development Bond Issuers, a national lobby group.

Bond issuers are lobbying representatives on the House Ways and Means Committee to take up the matter when they consider amendments to the Tax Reform Act of 1986 in June, said Rosemary L. Kuropat, senior vice president of the New York City Industrial Development Agency.

The Erie County IDA has issued 308 tax-exempt bonds since 1971 to raise $611 million for local companies, Swist said. Since 1983, the bonds have helped create or retain about 11,000 jobs.

The Amherst IDA since 1979 has issued another 107 bonds to raise $189.2 million for companies in the town, according to James J. Allen, executive director of the Amherst IDA. The bonds helped create or retain almost 10,000 jobs, Allen said.

As tax-exempt bonds began to be phased out with the passage of tax reform in 1986, the Erie County IDA and the Amherst IDA have responded by issuing federally taxable bonds. These bonds, like federally tax-exempt bonds, provide local tax breaks but do not provide federal tax breaks.

The problem is that taxable bonds are suitable for larger companies, and they are best used for construction of new buildings. Tax-exempt bonds help smaller manufacturers, and they can be used to finance new equipment, Swist said.

The state Job Development Authority also will be affected. It raises funds to loan to companies by issuing bonds. The loss of federally tax-exempt bonds could cause the JDA to rely more on loan guarantees than on direct loans, and it could raise the interest rate of loans, Swist said.

Congress sought the elimination of tax-exempt bonds to increase tax revenues and reduce the budget deficit.

But the kind of "small-issue" bond used by IDAs would only cost $7 million in tax revenues the first year and an additional $12 million each year after, Ms. Kuropat said. At the same time, the new investments spurred by the bonds eventually would generate more tax revenues and reduce unemployment, she said.

"(The bonds) are one of the very few tools for agencies like ours to help manufacturing companies expand," Ms. Kuropat said. "Without manufacturing as a hub, the service economy just can't keep up."

Manufacturers in Japan and Europe enjoy capital costs that are as much as one-third to one-half cheaper than those of their competitors in the U.S. The bonds with low interest rates help redress that imbalance, Ms. Kuropat said.

Provided Congress does eliminate or postpone the sunset provision on tax-exempt bonds, the benefits would not be immediately felt in Erie County. A separate provision in the tax reform act makes it less profitable for banks to buy bonds. As a result, the Amherst and the Erie County IDAs each have issued only one tax-exempt bond last year, while they did a brisk business in taxable bonds.

IDAs must put together packages of many bonds totaling as much as $15 million to make the bonds worth a bank's while. That has worked in New York City, but there have not been enough tax-exempt deals in Erie County to do that, Swist said.

Ms. Kuropat said once the sunset provision is pushed back, the lobbyists will work toward changing the bank provision as well.

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