WASHINGTON -- One of the proposals now being bandied about to liberalize the arbitrage restrictions on tax-exempt bonds offers both rewards and risks that should be carefully considered.

The proposal, included in similar tax measures introduced by Rep. Beryl Anthony, D-Ark., and Sen. Max Baucus, D-Mont., to simplify and ease some of the 1986 bond curbs, would allow issuers who must rebate arbitrage profits on an issue to retain 10% of their arbitrage profits.

The measure, which offers advantages to both the federal government and issuers, is designed to encourage issuers to maximize their investments of bond proceeds, rather than going to extreme lengths as many currently do to keep the yield on their investments low enough to avoid paying the rebate.

It would discourage issuers from entering into so-called yield-burning transactions that the government fears may be producing illegal, but hard-to-police profits for suppliers of investment vehicles such as guaranteed investment contracts.

It also would encourage more efficient investments because issuers would be allowed to keep 10% of the arbitrage profit, while the Treasury would share the benefit of the investment by getting the remaining 90%.

While the plan has the backing of issuers and was recommended by the staff of the Ways and Means Committee for possible inclusion in Rep. Dan Rostenkowski's soon-to-be-introduced tax simplification bill, it is most notable for the reaction it got from a top Treasury official last week.

Kenneth W. Gideon, assistant secretary for tax policy, who has almost never uttered a kind word about tax-exempt bonds, said the proposal merits "serious consideration," even though the Treasury has not decided whether to support the plan because it would open the door to earning small amounts of arbitrage.

He cautioned that the plan needs to be studied to determine if it could undermine the arbitrage rebate requirement and to figure out the correct percentage that would encourage issuers to invest efficiently, but not lead them to undertake arbitrage-driven deals.

Those are wise suggestions by Mr. Gideon.

Some issuers have suggested that the proposed 10% amount that could be retained by, 20%, 30%, or even 40%. If issuers invested wisely and aggressively, the federal government would profit as well, they argue.

The danger, of course, is that too large a percentage might tempt issuers to engage in arbitrage-driven deals that could lead the market back to the same kind of well-publicized abuses that prompted Congress to impose the rebate in the first place.

Issuers need some relief from the rebate requirements and should be encouraged to invest efficiently and wisely.

But market participants must make sure that they do not open the door to new abuses that could jeopardize both the future easing of bond curbs or, worse yet, the tax-exempt status of municipal bonds.

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