WASHINGTON -- Rep. Jim McDermott, a self-proclaimed champion of municipal bonds, has confounded issuers by introducing legislation that would eliminate tax-exempt financing for public power projects.

The Washington Democrat's bond proposal is one of several in his legislation that would reduce tax incentives for fossil fuels while increasing incentives for renewable energy sources such as solar and geothermal power.

McDermott, a member of the House Ways and Means Committee, said his bill is necessary to "level the playing field" between non-renewable and renewable energy sources and to change a tax code that "discourages efforts to promote greater energy efficiency."

One way in which McDermott proposes to do this is by repealing the tax exemption for bonds issued "to build new coal, oil, and nuclear energy facilities," according to a description of the bill released by his office. Lobbyists who have studied the bill's language said, however, that it could be interpreted to apply to refundings.

The bill states that the tax code "shall not be construed to provide an exemption from federal income tax for interest on any bond issued as part of an issue if any portion of such issue is used to provide facilities for the furnishing of electricity" if the facility uses fossil fuel.

A spokesman for McDermott insisted that the congressman "is limiting the changes that he would make to new construction. Reissuances and environmental refittings, etcetera, are not included."

The repeal would be effective for bonds issued after the date of enactment of the legislation, which McDermott introduced May 4.

Municipal lobbyist said they were dumbfounded by McDermott's proposal, because he said in March that he wants to help champion the cause of tax-exempt finance on the committee and help fill the void left by the departure last year of Beryl Anthony, the former Arkansas congressman.

In a brief interview with The Bond Buyer March 17, McDermott said that "the public finance area is a very important area," and that Congress should look into ways of rolling back some of the restrictions imposed by the Tax Reform Act of 1986.

"I think that we ought to try [to ease bond curbs] partly for economic stimulation," he said in the March interview.

One municipal lobbyist said McDermott's decision to propose ending tax-exempt finance for public power "is strange behavior." The lobbyist added, "I don't know what to make of it."

Milton Wells, the director of federal relations for the National Association of State Treasurers, said he is "a bit confused by it."

But Micah S. Green, the executive vice-president of the Public Securities Association, said he is not giving up on McDermott.

The legislation "does not indicate to us McDermott is not a supporter of municipal bonds," Green said. "We have a degree of faith that he continues in his support" for tax-exempt finance.

A spokesman for McDermott said the legislation should not be viewed as an attack on municipal finance because the bill "is very limited in its application." In the legislation, the congressman "is not addressing tax-exempt bonds in general. He is seeking to make sure the message that gets sent by our tax code on energy decisions is a message that makes sense for energy policy."

The American Public Power Association, in a May 5 letter to McDermott, criticized him for proposing to curtail the ability of the 2,000 municipally owned utilities in the United States to use debt financing, while leaving intact tax incentives for investor-owned utilities, which comprise a much larger portion of the electric utility universe.

Another problem with McDermott's proposal is that it "would have Congress reach into the decision making process of the local public power system," the letter states.

"It is no more appropriate for Congress to micro-manage local communities in the manner you are considering than it would be for Congress to determine that public transit systems may not use tax-exempt bonds to finance the purchase of mass transit vehicles powered by internal combustion," the group told McDermott in its letter.

Lobbyist said the prospects for McDermott's bill are unclear. McDermott did not attempt to add the bill to President Clinton's tax package when it was considered by the Ways and Means panel last week.

But panel chairman Dan Rostenkowski, D-Ill., promised his members he would attempt to draft a second tax bill, which would give McDermott another chance to move his proposal forward.

There is also the possibility McDermott may not be around much longer to push his legislation. A story in yesterday's edition of The Washington Post said McDermott is the leading candidate to become the Clinton administration's "AIDS czar," a new position the President promised to create to coordinate federal policy regarding acquired immune deficiency syndrome.

Even if McDermott were to leave, however, his bond proposal would probably not be forgotten, lobbyists said.

"You're always concerned when a member singles you out and puts you on the table as a revenue raiser," said Alan H. Richardson, the assistant executive director for the public power group.

The concern is that, even if McDermott's bill never moves forward, other members looking for revenue-raising items to offset their favorite revenue-losing amendments could claim McDermott's bond proposal for their own, Richardson said.

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