WASHINGTON -- Several organizations representing state and local governments are pushing the White House not to seriously consider a proposal for subsidizing taxable bond issues.
Lobbyists for the organizations yesterday said the so-called taxable bond option is being explored by Clinton Administration officials as they develop a legislative package for financing infrastructure improvements. In May, President Clinton said he would offer such a package to Congress early next year.
Led by the Government Finance Officers Association, the organizations are sending a letter to the White House this week saying they are encouraged by the effort to produce an infrastructure package, but concerned about the taxable bond option. In the letter, the lobbyists request a meeting with the administration to discuss ideas for the package.
Other groups signing the letter include the National Association of Counties, National Association of State Treasurers, National League of Cities, and the American Public Power Association.
The taxable bond option is an idea that has been raised several times since the late 1960s but has never become law. Under such a plan, a state or local government could choose to forgo the tax exemption on municipal bond interest in return for a subsidy from the federal government.
The idea first surfaced in 1968 when President Lyndon Johnson proposed the taxable bond option for issuers of bonds for pollution control and waste treatment plants. Later that year, House Banking Committee chairman Wright Patman, D-Tex., and Sen. William Proxmire, D-Wis., offered broader plans that would have extended the option to all tax-exempt bonds. But the bills were never passed by Congress.
Yesterday, state and local lobbyists said they opposed the taxable bond option because the federal subsidy on the taxable bonds would come from annual congressional appropriations. Municipal bond issuers are concerned that they could not rely on Congress to renew that appropriation every year, especially now that lawmakers are trying to cut the federal deficit, the lobbyists said.
That concern is shared by municipal bond underwriting firms, said Micah Green, the executive vice president of the Public Securities Association.
"This is a 25-year-old idea that has proven to be ineffective as an option for tax-exempt bonds," Green said. Depending on Congress for a steady stream of payment over the life of a bond issue "creates uncertainty that's counterintuitive to the financing of long-term capital projects," Green said.
Green said he is confident that the Clinton Administration will come up with ideas for bond financing of infrastructure that are more useful than the taxable bond option, which is "more directed toward reform of tax-exempt bonds" than to rebuilding infrastructure.
If the administration is exploring the taxable bond option as a low-cost way of financing infrastructure, it may be in for an unpleasant surprise, according to a housing industry official.
Since the taxable bond option was first suggested, tax-exempt bonds have been sharply restricted by Congress. In particular, the Tax Reform Act of 1986 eliminated certain types of private-activity bonds and imposed the private-activity bond volume cap,
It also contained revenue-raising provisions, including the arbitrage rebate requirement, under which state and local governments have been sending millions of dollars in rebate payments to the Treasury for the last several years.
Taking those rules into account, revenue estimators examining the taxable bond option may find that it does not save the federal government much money, the housing industry official said.
