WASHINGTON - Tax conferees have drastically weakened the tax-exempt bond component of the enterprise zone proposal that was included in the final version of President Clinton's budget and tax package.

On the positive side for the municipal market, however, the final agreement that negotiators completed Monday night would make permanent the tax exemptions for mortgage revenue bonds and small issue industrial development bonds, and the low-income housing tax credit. All three expired June 30,1992.

In addition, the bill would end the requirement that bonds for high-speed rail projects receive an allocation under the private-activity volume cap for 25% of each issue. But in a change from the original House proposal, the conferees restricted the exemption from the volume cap to governmentally-owned projects.

While praising the bond extensions and high speed rail provision, bond proponents criticized the conferees' decision not to allow enterprise zone bonds to be bank-deductible or partially exempt from the volume cap, as the House had originally proposed.

That decision caused "an evisceration" of the measure that makes the bond component practically worthless, said Frank Shafroth, the director of policy and federal relations for the National League of Cities. "It leaves a shell without much substance."

Another negative for the municipal market in the final bill is a provision that would require securities firms, for tax purposes, to report the market value of the municipal bonds and other securities they hold in their portfolios. In addition, the final bill would require bonds purchased at a market discount after April 30, 1993, to be taxed as ordinary income rather than as capital gains.

The package now faces a final vote in the House and Senate this week, and congressional leaders are predicting it will be approved. "I think things are looking pretty good," House Ways and Means Committee Chairman Dan Rostenkowski, D-Ill., told reporters yesterday after briefing panel members on details of the bill.

Rep. Ben Cardin, D-Md., a Ways and Means member who has pushed for easing tax-exempt bond curbs, said that overall the conference agreement was beneficial for bonds because it retains the House provisions on mortgage bonds, IDBs, and high-speed rail, and includes a bond component for enterprise zones, even though that provision was scaled back.

But Cardin also said he was disappointed that Congress did not go further in easing tax-exempt bond curbs.

"We did not have a chance to add the H.R. 11 items," he said, referring to provisions in last year's tax bill that were vetoed by President Bush. Those provisions included increasing the small-issuer exemptions from the arbitrage rebate requirement and from limits on bank deductibility.

Rep. Charles B. Rangel. D-N.Y., a tax conferee and ardent supporter of enterprise zones, said he was pleased with the final version of the zone proposal, despite the cutbacks.

"It's okay, judging from where we started from. The Senate had zip," Rangel said, referring to the absence of an enterprise zone proposal in the Senate's version of the bill.

Originally, the House had proposed creating 110 enterprise zones, economically depressed areas where tax incentives would be offered to start up businesses or persuade existing ones to stay. The Joint Tax Committee estimated the price tag for the proposal at $5 billion over five years.

The 110 zones included 10 "empowerment zones" that would receive a wide array of federal benefits and 100 "enterprise communities" that would be eligible for a smaller number of benefits.

For both types of zones, the House bill and the final conference agreement would permit the issuance of a new category of exempt facility bond to finance businesses in the zones.

Under the House bill, the bonds would have been bank eligible, regardless of the size of the issuer. In addition, 75% of each bond issue sold for businesses that are more than 50% owned by residents of empowerment zones would have been exempt from the volume cap. All other bond issues would have been 50% exempt from the cap.

But the final conference agreement cut the number of empowerment zones to nine and the number of enterprise communities to 95. The agreement also wiped out the provisions for bank deductibility and exemption from the volume cap. The joint tax panel's revenue estimate for the final version of the enterprise zone plan was $2.5 billion.

The renewal of the mortgage bond and IDB exemptions and the housing credit would be retroactive to the June 30, 1992, expiration date. Those provisions are effective upon the enactment date of the bill, so that issuers could begin issuing mortgage bonds and IDBs again as soon as Clinton grants final approval, Clinton's signature would presumably come this month.

The final bill also makes several changes to rules governing mortgage revenue bonds so that the proceeds can be used more effectively to benefit low-income first-time home buyers.

The conferees agreed to permit mortgage bonds, to be used to finance newly constructed two-family homes. Lobbyists said that they understood the provisions to apply only to economically distressed areas.

The conferees also clarified a provision in the tax code to make it clear that state and local issuers who subsidize their mortgage bond loan programs are not inadvertently running afoul of the law.

By offering additional subsidies to home buyers, those issuers could be considered part-owners of the housing units in the eyes of the Internal Revenue Service, something forbidden in mortgage bond regulations. The provision added by the conferees clarifies that in cases in which subsidies are involved, the issuer would not be considered a part-owner of the unit.

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