WASHINGTON -- Municipal bond market participants and supporters told Congress yesterday that the federal tax code must be changed to ease the curbs on tax-exempt municipal bonds to stimulate new investment in the nation's infrastructure.

In testimony before the House Public Works and Transportation Committee's economic development subcommittee, issuers, underwriters, bond counsel, and congressional supporters of the tax-exempt market said easing the bond curbs represents one of the only viable ways to spur financing of infrastructure projects since the federal government cannot afford to pour massive amounts of money into direct grants.

Even though the public works panel focuses on infrastructure and has no jurisdiction over tax issues, Rep. Robert E. Wise, D-W. Va., the chairman of the subcommittee, said the hearing was held as "part of a systematic effort to draw attention to the need" for increased infrastructure spending.

"Ways and Means has the jurisdiction [over tax issues in the House] ... but there's a need to build a consensus," Wise said.

Beryl F. Anthony, a former congressman who championed easing the bond curbs when he was a member of the Ways and Means Committee, told the panel: "Tax code relief for state and local governments offers an extraordinarily effective way of opening the offensive to address this nation's deficient infrastructure.

"Capital will come, but not from federal appropriations, but from an existing, well developed market that repeatedly has demonstrated its ability to provide low-cost funding," said Anthony, who founded the Anthony Public Finance Commission, which studied ways to ease the curbs in the Tax Reform Act of 1986 that were causing problems for state and local bond issuers.

The commission, which is now dormant, issued a report in 1989 detailing several recommendations for easing the curbs plus a proposal that would allow some kinds of projects owned and operated by private entities to be financed with public-purpose bonds.

Rep. William J. Coyne, D-Pa., a House Ways and Means Committee member who has introduced legislation to carry out some of the Anthony Commission's recommendations, told the panel "the need for this legislation reflects the fact that while the demands on state and local governments have increased substantially, the resources at their disposal have declined."

Coyne's bill, entitled the Public Finance and Infrastructure Investment Act of 1993, would create a tax-exempt bond program for economically distressed communities and ease several of the 1986 bond curbs.

Witnesses agreed on the negative effects of the 1986 tax changes and said that Coyne's bill would make great strides in solving some of those problems.

"We realize that Congress will not restore the pre-1986 conditions for tax-exempt bonds. It appears to be agreed, however, that the 1986 Tax Reform Act went too far," said Liane Levetan, chief executive officer of De Kalb County, Ga., who represented the National Association of Counties.

States and municipalities need "congressional clarification on what is public purpose [financing] and the type of private participation permitted to have a bond qualify for tax exemption," Levetan said.

Of the many changes in the tax code aimed at easing municipal bond curbs and the many new types of bonds that could be created, the Government Finance Officers Association's call for the creation of a "mandated infrastructure facility" bond caught Chairman Wise's attention.

This new kind of tax-exempt bond, which was first proposed by the GFOA about 18 months ago, could be issued to construct or acquire infrastructure facilities that the federal government requires states or localities to build to satisfy new federal regulations. It also could be used to finance part of any existing facility that must be rehabilitated in order to comply with a federal mandate, said John F. Wenderski, finance director for Prince William County, Va., who represented the Government Finance Officers Association.

The proposal would give the mandated infrastructure bonds more favorable treatment than governmental bonds, Wenderski said. The bonds would be exempt from state volume caps, exempt from limitations on refinancings that prevent interest cost savings, and would provide more flexibility for state and local governments to work with the private sector, he said.

George B. Pugh, executive vice president and managing director of Craigie Inc., who represented the Public Securities Association, also suggested making several changes in the tax code to improve the ability of state and local governments to finance infrastructure projects, including spurring the demand for tax-exempt bonds by banks by raising the limit on the issuance of bank qualified bonds from the current $10 million per year to $25 million.

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