WASHINGTON -- If history repeats itself as it so often does, the municipal bond market could face some rough sledding in Congress in the new year.

A good example lies in the situation the market found itself in the mid-1980s.

Many market participants had been trying to convince Congress during the early part of the decade to approve a limited expansion of powers for tax-exempt bonds.

At the same time, however, two opposite developments were taking place.

The congressional tax committees started zeroing in on a number of alleged abuses involving tax-exempt bonds, ranging from arbitrage to private-activity bonds.

And momentum was building to try to reform the entire tax code.

The rest is history. Not only did Congress refuse to ease any existing limits on tax-exempt bonds, but it imposed the toughest curbs ever, partly to curb the perceived abuses and partly to raise revenue needed to pay for lowering tax rates.

A somewhat parallel situation may be developing now.

While most of the old abuses appear to have been wrung out of the system, the Orange County derivatives investment debacle has put the market under a microscope as market participants continue pushing Congress to loosen some of the curbs on tax-exempts, in the hopes of boosting financing for infrastructure and public-private partnerships.

And much like the mid-1980s, the municipal market has come under scrutiny just as Congress begins to search for new revenues to pay for tax cuts that have been proposed by both Republicans and Democrats.

There is a lot of uncertainty about what will happen next.

If municipal market participants had to appear before the House Ways and Means Committee right now, some lobbyists believe the current controversy over Orange County would seriously jeopardize any attempts to expand bond powers.

The fallout from Orange County specifically could stifle attempts to convince Congress to include a provision in proposed capital gains legislation that would eliminate a 1993 measure that treats the discount from bonds sold at a market discount after April 30, 1993, as ordinary income, rather than as capital gains.

It could also prompt the tax committees to rethink the exemption from the arbitrage restrictions that was granted to state and local government pools that temporarily invest bond proceeds.

If the Orange County debacle does not spread, some lobbyists think basic public finance issues, such as easing some of the overall bond curbs, will not be hurt.

But a lot depends upon what happens at a hearing on Orange County that Sen. Alfonse D'Amato, R-N.Y., the incoming Senate Banking Committee chairman, will hold on Jan. 5, and on a Jan. 10 meeting on disclosure to be led by Rep. Jack Fields, R-Tex., the new chairman of the securities subcommittee of the House Commerce Committee.

If those hearings unearth more problems, it's going to be a rough year.

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