Bush, Bentsen push urban bills easing curbs on bank bonds.

WASHINGTON - President Bush and Sen. Lloyd Bentsen are proposing major liberalizations of the limits on the bank-eligible municipal bonds as part of their separate urban aid bills.

The Bush administration and the Texas Democrat, according to proposals released yesterday, would significantly ease one of the major tax-exempt bond provisions of the Tax Reform Act of 1986. Both proposals would permit banks to deduct 80% of the cost of the purchasing and carrying a new kind of private-activity bond that could be sold by any size issuer in enterprise zones.

Outside of enterprise zones, Sen. Bentsen, chairman of the Senate Finance Committee, wants to go even further. He has proposed allowing banks to deduct carrying costs for issuers anywhere in the country that expect to sell no more than $25 million in governmental bonds annually. The current limit is $10 million.

The finance panel is scheduled to vote tonight on Sen. Bentsen's bill. Sen. Bob Packwood, R-Ore., the panel's ranking Republican, said yesterday he will also push for a committee vote on the President's package. Other Senate sponsors of that package are Sen. Bob Kasten, R-Wis., and Sen. Joseph Lieberman, D-Conn.

The cornerstone of Sen. Bentsen's and President Bush's urban aid bills are enterprise zone proposals. These contain major differences, but are very similar in their proposals for easing tax-exempt bond curbs in the zones, defined as economically depressed areas in which tax incentives would be offered to lure new businesses or retain existing ones.

Sen. Bentsen and President Bush both propose creating a new category of exempt-facility bond, with enterprise zone businesses using the proceeds to purchase land, buildings, and equipment, but not housing facilities.

Under the both bills, bonds issued for such businesses would be bank-eligible, regardless of the size of the issuer. Currently, banks can only deduct 80% of the cost of carrying government bonds sold by issuers that expect no more than $10 million annually.

Bonds issued under President Bush's proposal would be subject to the private-activity bond volume cap, but Sen. Bentsen's proposal would allow 50% of each issue to be exempt from the cap. The limit on the amount of bonds that could be issued for one business is $5 million under the President's plan, while Sen. Bentsen's proposed limit is $1 million.

In addition, proceeds of enterprise zone bonds would have to be spent within 18 months of the date of issuance under Sen. Bentsen's plan. President Bush's proposal is silent on that issue.

Over all, the major difference in the two enterprise zone proposals is the number of zones that would be created. Sen. Bentsen's plan would designate only 25 zones, while the President's plan would allow any economically distressed area that fits certain criteria to be deemed an enterprise zone.

But Sen. Bentsen's proposal would allow the bond component to apply to distressed areas that qualify for enterprise zone status but are not designated as enterprise zones.

The House approved enterprise zone legislation earlier this month that would take a slightly different approach to bond issuance. The House bill would ease current rules governing tax-exempt qualified redevelopment bonds so they could be used in the zones.

Such bonds would not be bank-eligible under the House bill, but 50% of each issue would be exempt from the volume cap. The limit on bond proceeds used by an individual business would be $2.5 million.

In addition to enterprise zones, Sen. Bentsen's bill also contains 18-month extensions for the tax exemptions on both mortgage revenue bonds and small-issue industrial development bonds, and the low-income housing tax credit, all of which expired June 30.

Sen. Bentsen's bill also includes a measure approved by the House on Monday that would allow New York City to issue tax-exempt bonds to expand the offices of the United Nations and keep the organization from moving some of its agencies out of the city.

The German government has offered rent-free office space in Bonn to four United Nations agencies. To keep those agencies in New York, officials there want to offer incentives to the United Nations, including additional office space financed with tax-exempt bonds. The bill would repeal a provision in the Tax Reform Act of 1986 that prevents tax-exempt bonds from being issued for that purpose.

On the negative side for the municipal market, Sen. Bentsen's bill includes a provision requiring securities firms to report, for tax purposes, the market value of municipal bonds and other securities they hold in their inventories.

Another provision in the bill could weaken demands for so-called college saver bonds, debt that state and local governments market to parents saving for their children's college education.

Currently, the 1988 law allows taxpayers with incomes below a certain level to exclude from gross income the full amount of interest earned on Series EE U.S. savings bonds if they redeem the bonds to finance their own children's college expenses. Expanding on that law, the provision would waive the income limitations and allow taxpayers to use bond proceeds to finance college expenses of students other than their own children.

Elsewhere in the bill, Sen. Bentsen's proposal for increasing the so-called small issuer banks eligibility limit to $25 million is part of a simplification package that the finance panel approved in March and that he has added to his urban aid bill.

The bill also would enable pooled financing bonds to qualify for the bank deduction "if all borrowers from the pool would qualify if borrowing directly from a financial institution, and if certain other requirements were satisfied." The provision would apply to bonds issued after Dec. 31, 1992.

Another provision in the simplification package would remove the $150 million limit on the amount of bonds that individual 501(c)(3) entities other than hospitals may have outstanding at one time.

The proposal would also reclassify 501(c)(3) bonds as governmental bonds. Current law considers them private-activity bonds even though they are exempt from the private-activity volume cap.

Other provisions of the simplification package would:

* Expand the six-month exemption from the rebate requirement to an issuer who has spent 95% of an issue's proceeds within that period.

* Ease requirements for bona fide debt service funds under the 1989 arbitrage rebate relief law.

* End the requirement that two bond issues paid from substantially the same source of funds be treated as the same issue if they are issued within 31 days of each other and as long as one of the issues is a tax and revenue anticipation note.

* Give the Internal Revenue Service authority to waive the requirement that taxpayers report their tax-exempt income each year to the agency on their income tax returns.

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