WASHINGTON - The municipal market may finally have a window of opportunity in the first half of 1993 to push Congress to make two popular bond programs permanent and ease a host of other tax law bond curbs.
The tax-exempt bond community is finishing up an unusually frustrating year, during which President Bush vetoed two bills by Congress that were designed to simplify the arbitrage rebate requirement, increase bank demand for municipal bonds, and extend the tax exemptions for mortgage revenue bonds and small-issue industrial development bonds.
Now President-elect Bill Clinton is poised to offer an economic stimulus package that congressional aides and lobbyists say is likely to be the vehicle for passing many of those bond proposals early in the new administration.
But several of those sources caution that the scenario is not all rosy for bond market participants. Another top priority of the incoming President is to cut the federal budget deficit, which would likely leave little money to spend on rolling back bond curbs.
Capitol Hill observers are divided over how quickly tax legislation can be enacted next year. Several said they thought the tax-writing process can be completed in the first quarter, but others said late June or early July is more realistic.
How quickly a tax bill can be enacted is critical for proponents of mortgage bonds and IDBs, because authority to issue those bonds expired June 30, 1992.
One congressional aide said, "If Clinton sticks to what he says he's going to [do], he's going to choose a very narrow universe of things and try to push it through fast."
That would cast him in the mold of former President Reagan, who was the most adept in recent memory at getting a tax bill through Congress quickly, the aide said. Even under Reagan, however, the tax bill was not enacted until July, so Clinton is unlikely to be able to move much faster, the aide added.
One factor likely to slow down the tax-writing process is the changeover in the leadership of the Senate Finance Committee, aides and lobbyists said. Sen. Daniel P. Moynihan, D-N.Y., is next in line to lead the panel now that the chairman, Sen. Lloyd Bentsen, D-Tex., has been tapped by Clinton to be his Treasury secretary.
Moynihan is "a new chairman who has yet to establish his style in running the committee," said a state and local lobbyist. Although he has had experience chairing the Senate Environment and Public Works Committee, he will need some time to put his staff in place on the finance panel, and that time will slow down the work of the committee, the lobbyist added.
On the other hand, an early bill could be driven by the need to approve legislation to increase the federal debt limit. Treasury borrowing is likely to reach the debt limit, now at $3.23 trillion, sometime in March, analysts have said. In past years, a debt-limit bill has often formed the core of tax legislation because it was considered a must-do item.
Lobbyists Agree on the Tax
Items Clinton Will Tackle
Connected to the question of timing is the question of how many tax bills there might be next year. If Clinton is very concerned about showing the country he is trying to stimulate the economy, he may want to try to push through a small bill containing his top priorities and then draft a second bill with other tax measures later in the year, some lobbyists and tax aides said.
"I have sort of been working from the assumption there will be two bills, a quick one and then a more comprehensive one that will run a real risk of slipping," said Frank Shafroth, director of policy and federal relations for the National League of Cities.
But other Capitol Hill observers said the possibility of two tax bills seemed remote.
"I lean toward the one-bill scenario because I don't see how you can get two bills done," said a state and local lobbyist.
Similarly, a municipal finance lobbyist said, "I never expect more than one tax bill. It's so hard to put one together."
Though they are divided on the timing and number of tax bills, sources are in complete agreement about the major tax items likely to be enacted next year. For example, they noted that Clinton has made it clear he will push for a resurrection of the tax credit for business investment, and for a limited reduction in the capital gains tax rate.
In addition, lobbyists and tax aides said the bill will almost certainly contain a "fairness" component that would raise taxes on the wealthy while giving a small break to the middle class.
For the municipal market, the most pressing question is what will happen to the tax exemptions for mortgage revenue bonds and small-issue industrial development bonds, which have been in limbo for nearly six months.
In 1992, Congress slogged through the tax-writing process twice, completing bills in March and October that were ultimately vetoed by President Bush. Both times, proponents of mortgage bonds and IDBs came tantalizingly close to seeing those tax breaks made permanent.
In each case, the House approved permanent extensions of the mortgage bond and IDB exemptions, while the Senate approved shorter-term extensions. The final version of the March bill would have extended both through June 30, 1993, while the final October bill would have made mortgage bonds permanent and extended IDBs through Sept. 30, 1993.
Another tax break important to the municipal market, the low-income housing tax credit, would have been made permanent under both the March and October bills.
In 1993, "there will be a very serious effort to get [the expiring provisions] done" on a permanent basis, said a Senate aide, who added that he was more optimistic than ever. "There is going to be a real desire to put those behind us."
Another factor in their favor is the President-elect, who has stated publicly that he supports extending the mortgage bond and IDB exemptions and the housing credit.
John T. McEvoy, executive director of the National Council of State Housing Agencies, said he is hopeful because "you start off with Congress being freshly on record for permanent extensions and you've got a President-elect who has committed many, many times in writing that he would seek a permanent extension of both programs."
But a number of lobbyists said that even the support of Congress and Clinton may not be enough to make the three tax breaks permanent next year, because revenues will still be tight.
"We could become the victims of limited revenues," said John C. Murphy, executive director of the Association of Local Housing Finance Agencies.
"I think there will be talk about doing the extenders permanently, but you've got the same problem you've always had. The revenue estimates haven't changed." said Milton Wells, director of federal relations for the National Association of State Treasurers.
Clinton and Congress may decide they cannot afford the extenders' price tag, especially because "the real emphasis we saw out of Little Rock [in the economic summit] demonstrated a real commitment to a long-term reduction in the deficit," Shafroth said.
Beyond the mortgage bond and IDB exemptions, lobbyists said there is a good chance Congress might again approve many of the other bond provisions included in the 1992 bills.
Those two bills took a brand new step in the area of bond demand. Under current law, banks may deduct 80% of the cost of carrying tax-exempt bonds if they are purchased from issuers who expect to sell no more than $10 million annually. Both bills would have increased the supply of bank-qualified bonds by raising that limit to $20 million.
The bill passed by Congress in October also would have eliminated the $150 million on the amount of bonds that individual 501(c)(3) institutions may have outstanding, and would have reclassified 501(c)(3) bonds as public-purpose debt. That provision was not in the final version of the March bill, although the Senate version at that time had contained the measure.
The March and October bills did contain an identical group of items designed to simplify the arbitrage rebate requirement and other tax law bond curbs. For example, the two bills would have increased the $5 million small-issuer arbitrage rebate exemption to $10 million.
Simplification, in fact, is likely to be at the top of House Ways and Means Committee Chairman Dan Rostenkowski's list, because the Illinois Democrat was the chief architect of a comprehensive simplification proposal two years ago, the Senate aide said.
"Do you think Rostenkowski isn't going to [resurrectl simplification? He worked really hard at it and everybody likes it," the aide said.
Hopes Grow for Changing the
Private-Activity Volume Cap
Most lobbyists, however, said it would be difficult to guess how much of the 1992 legislation would find its way into the 1993 tax-writing process.
"There certainly will be efforts to bring all those other provisions back, but it is not clear to me what will be the ground rules" of the tax committees, said the municipal finance lobbyist. "Although I think there will be a bill and it will include Clinton's economic program and expiring provisions, I don't know how much beyond that will get in. "
That uncertainty has not stopped some municipal bond proponents from speculating that Congress could consider more changes in the municipal area. One major area of concern, they said, is the private-activity bond volume cap.
"Enough states clearly have volume cap problems that not to raise it in the context of economic stimulus and infrastructure is absurd," said Micah S. Green, executive vice president of the Public Securities Association.
Murphy, however, said 1993 may not be the year to push for easing of the volume cap. "I see the volume cap as perhaps a little longer-range issue," because " I think we're looking at limited revenues that are going to be available" next year, Murphy said.
The congressional tax aide, meanwhile, predicted that next year's tax bill will not go too far beyond major economic stimulus items and extensions of the expired tax provisions. Clinton and Congress will be motivated to keep the bill narrow because, to move through the process quickly, it cannot become loaded down with a large number of extraneous items.
"The more it junks up, the more everything gets delayed," the aide said.