Tax on bond insurers must not return, industry leaders say.

WASHINGTON -- With the death this week of the Superfund reauthorization bill, Congress failed to put to rest the question of whether to tax the municipal bond insurance industry to help pay to clean up the nation's worst toxic waste sites.

When the Superfund measure is resurrected next year, House tax lawmakers will probably reverse themselves and follow the lead of the Senate Finance Committee in passing a bill that exempts the bond insurers from the proposed new tax on insurance companies, said Robert Genader, the chairman of the Association of Financial Guaranty Insurers.

"We are optimistic that when this gets brought up again next year, the bond insurers will not be part of it," said Genader, who is also an executive vice president at AMBAC Indemnity Corp. "I think [the efforts to tax us] were an oversight."

But a securities industry lobbyist said the insurers and bond issuers will have to watch carefully to make sure the tax is not applied to bond insurance companies, said John Vogt, vice president of the Public Securities Association.

"I think while we view the Senate Finance Committee action as a very positive step, we need to keep a weather eye on the legislative process next year to make sure the mistake [of trying to tax bond insurance companies] is not re-made," Vogt said.

The insurance tax issue surfaced in August, when the House Ways and Means Committee passed legislation to reauthorize Superfund, the 1980 law that provides for cleanup of thousands of sites around the country identified by the Environmental Protection Agency as having been contaminated by industrial waste.

As part of the reauthorization effort, the Treasury Department proposed creating an Environmental Insurance Resolution Fund to help settle the huge number of disputed claims involving Superfund liability.

To finance the fund, the Treasury proposed levying billions of dollars m new taxes on commercial insurance companies, including municipal bond insurers. The proposed tax was included in the Ways and Means bill.

But after the Ways and Means Committee acted, the Treasury changed its mind, citing concerns that bond issuers would pay the ultimate costs. The Treasury told the Senate Finance Committee that the bond insurance companies should not be subject to the tax. Following the advice, the finance panel passed a Superfund bill on Sept. 29 that exempted the bond insurers.

Given the Treasury's strong recommendation, lobbyists said they expected that when House and Senate conferees met to hammer out a final bill, House lawmakers would agree to exempt the bond insurers.

But the legislation stalled before getting to the conference committee. Busy with other items, the House and Senate failed to pass their respective bills, and on Wednesday congressional leaders said there was no chance to complete the Superfund reauthorization effort this year. They said they will start early next year to again draft the reauthorization measure.

State and local issuers joined the bond insurers in objecting to the insurance tax, saying that the levy on insurers would be passed through to issuers and raise their costs of borrowings.

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