WASHINGTON - Municipal bond proponents were treated last week to a gold mine of information about the Clinton administration's views on tax-exempts.
The market had always known President Clinton favors municipal bonds, but not to what degree. Clinton's few bond proposals in his tax package didn't indicate how far he would be willing to go in rolling back bond restrictions in the Tax Reform Act of 1986. But thanks to a hearing in a House Ways and Means subcommittee last Tuesday, it's now clear there are limits to what the administration will support. The Clinton White House is willing to move farther than the Reagan and Bush administrations in easing municipal bond curbs, but it is not prepared to eviscerate the 1986 tax law's restrictions on tax-exempts. At least, that's the impression left by the Treasury Department's assistant secretary for tax policy, Leslie Samuels. He was appearing before the Ways and Means Committee's subcommittee on select revenue measures to offer the administration's views on over 100 tax-related proposals.
The list, which includes nearly two dozen tax-exempt bond proposals, could possibly form the basis for a second tax bill later this year. The themes in Samuels' testimony are pretty clear: The administration does not want to see proposals that would result in large amounts of new tax-exempt volume, nor any that would eliminate key elements of the 1986 act.
Those themes are summed up in Samuel's criticism of a proposal by Rep. Ben Cardin. D-Md., to ease the private-use test. Under current law, a municipal bond issue is deemed taxable if more than 10% of the proceeds are used to benefit private business. Although Cardin has not yet suggested a new level, an aide has said a return to the pre-1986 threshold of 25% is under consideration.
Samuels warned that raising the 10% limit "would be a reversal of one of the . . . major changes to tax-exempt bond rules made by the Tax Reform Act of 1986. The benefit of tax-exempt financing should be limited to state and local governments. This change would result in a significant increase in the volume of tax-exempt bonds, with this increase being attributable to increased private benefit."
Another theme in the testimony is that the administration is open to reasonable changes, which it seems to define as ones that would simplify the law or create a level playing field among different types of issuers.
Samuels' explanation of why the administration does not object to a proposal on 501(c)(3) bonds is a good example. The proposal, by Rep. Robert T. Matsui. D-Calif., would eliminate the $150 million limit on the amount of tax-exempt bonds that individual 501(c)(3) organizations, other than hospitals, may have outstanding at one time.
The proposal has merit partly from an equity standpoint, Samuels said. "Large public universities and 501 (c)(3) hospitals are not subject to similar restrictions," he said. But simplification is a consideration as well. "In addition, the technical rules associated with the $150 million cap have proven complex and difficult to administer." Samuels said.
Despite the administration's willingness to make some changes, Samuels' testimony may still be a disappointment to municipal bond proponents, who thought Clinton might push for major modifications in the bond area. For example, they have been hoping the President would embrace Beryl Anthony's idea for creating a third category of municipal bond, the "public activity bond."
Anthony, a former Arkansas congressman, envisions the public activity bond as one that would boost bond issuance for environmental facilities like sewage treatment or hazardous waste disposal plants.
Those types of facilities serve a public purpose, but by their nature require a high degree of private involvement. As a result, bonds for those facilities are considered private-activity bonds. Anthony's proposal would permit such bonds to be treated under the tax code like public purpose bonds.
Samuels' remarks about the 1986 tax law and private use would seem to indicate the Clinton White House would be wary of such a major change.
Are these positions coming from the White House or originating in the Treasury Department? It's impossible to tell. Whatever the answer, it is clear the administration will be no pushover for the arguments of those who want to roll back the clock to pre-1986.
