WASHINGTON - The House easily approved and sent to the Senate on Thursday a compromise $17 billion urban aid tax package that would permanently extend the tax exemption for two popular bond programs and ease curbs on redevelopment bonds used in enterprise zones.
The package was swiftly approved on a 356-to-55 vote, which was well above the two-thirds level needed for the bill to pass under expedited procedures used by House leaders to prevent unrelated amendments from being added to the measure.
However, the package will not be taken up by the Senate Finance Committee until after July 20, when the Senate returns from a three-week recess and may not be considered by the full Senate until early August.
Senate Finance Committee Chairman Lloyd Bentsen, D-Tex., said yesterday he plans to make some changes in the enterprise zone portion of the package approved by the House, but would move quickly on the measure when the Senate reconvenes.
The House package contains a controversial mark-to-market requirement that, industry officials have warned, could hurt demand for municipal bonds.
The provision, which would require securities firms to report for tax purposes the market value of municipal bonds and other securities they hold in inventory, remained in the measure after a similar, but less onerous, proposal was dropped from a bill to extend jobless benefits that Congress raced to approve before the current extension of jobless benefits expired on Saturday. The mark-to-market requirement, which would raise about $2.65 billion in federal revenues, would be phased in over 10 years. The increase in firms' taxable income would be attributable to the change, front-loaded at 17% the first year, 10% in each of the next seven years, and 6.5% in the last two years.
Securities firms already are required to mark their securities to market for accounting purposes, but for tax purposes they have been allowed to choose whether to report the market value or the cost of securities.
The urban aid package, which would permanently extend the use of tax-exempt mortgage revenue bonds and small-issue industrial development bonds that expired last Tuesday night, finally made it to the House floor.
It did so only after two days of battles over an unrelated Social Security proposal, and after the Bush administration and House Republicans and Democrats hammered out a compromise on major elements of the urban bill, including enterprise zones, capital gains, and the so-called weed and seed issues.
Under those agreements, a total of 50 enterprise zones, evenly split between urban and rural zones, would be designated at a cost of $2.5 billion.
The compromise also calls for 50% of the capital gains from the sale of a business in an enterprise zone to be excluded from the capital gains tax. Additionally, another $2.5 billion would be provided to law enforcement, job training, and social services within such zones.
Tax-exempt redevelopment bonds could be used to finance loans of up to $2.5 million per business in the enterprise zones. The measure would ease use, repayment, volume limit, and other current law restrictions on redevelopment bonds.
Under current law, redevelopment bonds can only be used to finance the clearing of land, the rehabilitation of buildings, and the improvement of infrastructure. Also, tax revenues must be pledged to repay bonds, and 100% of a bond issue is subject to state volume limits.
But under the package, an issuer could provide its own guarantee or obtain a letter of credit or bond insurance to repay bonds. The bonds could be used to acquire land or to purchase equipment, and only 50% of an issue would be subject to volume limits.
The urban aid tax package also includes several bond-related tax simplification provisions, such as increases in the small issuer and six-month spending exemptions from rebate requirements. Under current tax law, an issuer is exempt from rebate if it expects to issue no more than $5 million in governmental bonds per year or, alternatively, if it spends all of its bond proceeds within six months.
The tax package would raise the small-issuer exemption to $10 million. It would also allow issuers to spend 95% of their proceeds within six months, as long as the 5% was spent in the next six months.
The package also contains proposals to: * Repeal a tax law provision that prohibits issuers from spending more than 5% of the proceeds of a governmental bond issue on uses that are "disproportionate and unrelated" to the purpose of the issue. * Allow two governmental bond issues to be issued simultaneously or within a month of each other without being treated as a sing issue, as long as one of the issues is a tax and revenue anticipation note expected to be exempt from rebate. * Exempt earnings on bona fide debt service reserve funds from rebate requirements if an issuer spends its proceeds according to the schedule laid out in the rebate relief law. * Repeal a tax law limiting the amount of private-activity bonds invested at a higher yield than the bond yield to 150% of annual debt service payments for the bonds. * Make it easier for state and local governments to use bond proceeds to prepay purchases of equipment at a discount.
Bond industry officials said they will strongly support the package because it contains many favorable bonds proposals, even though they oppose the mark-to-market requirement.