WASHINGTON -- Congress will probably approve proposals to simplify tax law bond provisions next year, but it is less likely to permanently extend the authority to issue mortgage revenue and small-issue industrial development bonds, a Senate tax aide said yesterday.
The simplification proposals probably would be passed as part of a major tax bill designed to stimulate the economy and to cut taxes for the middle class, said Lindy Paull, tax counsel to the Senate Finance Committee. Ms. Paull was speaking to the National Conference of State Legislature's state-federal assembly here.
Last year, Sen. Lloyd Bentsen, D-Tex., the chairman of the finance panel, and House Ways and Means Committee Chairman Dan Rostenkowski, D-Ill., introduced legislation that would simplify various parts of the tax code, including such municipal bond curbs as the arbitrage rebate requirement. But the two tax leaders failed to bring it to a vote in their panels.
This year, however, "we expect to move some of those [simplification] proposals forward" Ms. Paull said.
But she saw less chance for another municipal bond initiative -- permanent extensions for the mortgage bond and IDB exemptions. In November, when the Ways and Means panel approved an extension of those tax breaks to June 30, 1992, Rep. Rostenkowski vowed to have tax lawmakers examine each of the 12 expiring provisions, with an eye toward making some permanent and letting others die.
But Ms. Paull said Congress had attempted that kind of winnowing exercise before and had not been successful.
Now, lawmakers will have an extremely difficult time picking and choosing between the tax breaks because, "at this point in time, all 12 expiring provisions have significant widespread support."
The problem is that it would cost $25 billion to make all of them permanent, an amount of revenue lawmakers would have difficulty raising, she said.
"In the context of a big bill, I guess we could make them all permanent," she said. "But I kind of look upon this exercise a bit skeptically."
During the meeting, conference members expressed their concern about Congress's intention of reopening the federal tax code next year. Because many states' tax systems piggyback on the federal system, any changes Congress makes also will have to be approved by legislatures for states' use.
"When you start messing around with the tax code, get it over with in a hurry because there are a lot of us with very limited sessions," one state legislator said.
Ms. Paull said members of Congress are learning to pay attention to those types of considerations.
"There is a growing awareness at the federal level of the difficulties we put you in, in trying to catch up to us," she said.
Also yesterday, lawmakers at a Senate Finance Committee hearing outlined several proposals that could be included in next year's tax bill and that would help the tax-exempt bond market.
One of the committee members, Sen. John Chafee, R-R.I., urged Congress to make permanent the mortgage revenue bond exemption and the low-income housing tax credit. Chafee said the permanent extensions are needed to give a lift to the declining real estate industry.
Sen. Charles Grassley, R-Iowa, said Congress should grant a permanent extension to the tax exemption for small-issue industrial development bonds in cases where the bonds are used to provide loans to first-time farmers.
Sen. David Boren, D-Okla., did not make a direct suggestion concerning tax-exempt bonds but said Congress needs to rethink the 1986 law that created the corporate alternative minimum tax, because it may make U.S. firms less competitive in relation to their foreign counterparts.
Municipal market participants are concerned about the corporate minimum tax because it applies to interest earned on private-activity bonds at a rate of 20%. Corporations also are subject to an additional special adjustment to their minimum-tax income, which applies to interest earned on governmental and 501(c)(3) bonds at an effective rate of 15%.
"It is estimated that 40 to 60 percent of large U.S. companies may pay the alternative minimum tax in 1991," Sen. Boren said. "It is time to reevaluate the effects of the '86 law on our ability to compete in the world marketplace."
