WASHINGTON -- The tax simplification legislation introduced last week is more generous to tax-exempt bonds than industry officials had expected, lobbyists and lawyers say.
Sources say the legislation, which contains several provisions that simplify transactions and ease the arbitrage rebate requirements for small issuers, does not measure up to what the bond community had wanted because it contains only a few of the simplification suggestions made last year by Rep. Beryl Anthony, D-Ark., and by the staffs of the House Ways and Means Committee and the Joint Tax Committee.
But it still contains more provisions than many in the municipal market had expected. In the weeks before the legislation was introduced, the aides and lobbyists had predicted there would be little if any relief for tax-exempt bonds in the simplification legislation because it would be difficult to find revenue-raising items to add to the bill that would offset revenue losses from those provisions.
To the surprise of those officials, tax committee staff members found a way to include three major items: increasing from $5 million to $10 milion the small-issuer exemption from the arbitrage rebate requirement; eliminating overlapping arbitrage and yield restriction requirements, and repealing the requirement that no more than 5% of a bond issue go toward uses that are "disproportionate and unrelated" to the purpose of the issue.
Those provisions appear in a bill sponsored by House Ways and Means Committee Chairman Dan Rostenkowski, D-Ill., while other bond items are included in a separate bill he sponsored jointly with Senate Finance Committee Chairman Lloyd Bentsen, D-Tex.
Tax staff members have said two bills were introduced because, in the rush to get the legislation introduced just before the congressional Independence Day recess, not all the provisions could be incorporated into one bill.
Taken together, the two bills are "less than we hoped for, but more than maybe we could realistically expect at a time of revenue neutrality in tax policy," said Milton Wells, the director of federal relations for the National Association of State Treasurers.
"While clearly impediments in the law exist beyond these provisions, it's encouraging to see the leadership of the tax-writing committees within the definition of simplification proposing some very positive and constructive measures," said Micah S. Green, executive vice president of the Public Securities Association.
"It's all moving in the right direction," said Catherine L. Spain, director of the Government Finance Officers Association's federal liaison center. "Congress is beginning to realize how bad some of [the bond curbs enacted in 1986] were and are making some of the really necessary changes."
The most widely praised provisions are the three that appear in Mr. Rostenkowski's bill. A bond lawyer in the West Coast, in fact, said if those items were the only ones that passed out of all the simplification provisions, the bond community would be greatly helped.
One of those provisions would allow an issuer to halt rebate payments after the "temporary period" -- the few years after issuance when an issuer is not required to restrict the yield on bonds -- if the issuer agreed to yield-restrict to the bond yield. Under current law, an issuer must only yield-restrict to 0.125 percentage points above the bond yield, but that amount would still have to be rebated over the life of the bond issue.
On the surface, it would appear the provision is not all that helpful because issuers are already opting to yield-restrict to the bond yield so they have no arbitrage profits to turn over to the federal government, a bond lawyer in Boston said. "People don't seek to exploit that [0.125] differential as a general matter," the lawyer said.
But from the point of view of issuers, the provision is helpful even if they are earning no arbitrage because it would remove the need for them to periodically certify to the Treasury Department that they have no profits to rebate, another lawyer said. "It's helpful in getting rid of the mechanics of rebate through the term of the bonds," said a lawyer on the West Coast.
Ms. Spain suggested the provision could be improved by having issuers follow a schedule for spending their proceeds during the temporary period, rather than requiring them to rebate arbitrage profits during that time.
The bill introduced jointly by the two tax leaders contained several small provisions that had not been widely discussed in the bond community but which lawyers and industry officials said are helpful.
For example, one of those provisions would allow an issuer to extend his temporary period -- the three- or five-year period during which the issuer does not have to yield-restrict -- for one additional year.
The provision will be important to issuers because "the reality is that it's very easy to come to the end of three years" without having spend all the proceeds of an issue, and "yield restriction is unworkable," said Kristin Franceschi, a partner in the law firm of Piper & Marbury.
Lawyers also praised a provision that would ease requirements for bona fide debt service funds under the 1989 arbitrage rebate relief law. The law exempts issuers from rebate on most of their profits if they adhere to a two-year schedule for spending proceeds, but requires them to continue rebating on those funds.
The provision "is a wonderful addition because rebating on bona fide debt service funds is the most difficult [thing to do] for the least amount of revenue" gained by the federal government, said Dean Weiner, a partner in the law firm of O'Melveny & Myers. "That eliminates probably one of the harder parts of rebate."
Mr. Weiner also said the tax section of the American Bar Association has set up a task force chaired by Robert Buck, a partner with Palmer and Dodge, to study the simplification proposals and offer comments to the tax committees.
A provision expanding the six-month exception from the arbitrage rebate requirement received mixed reviews, however. Under current law, to be eligible for that exemption an issuer must spend all proceeds in six months except for a de minimis amount equal to the lesser of 5% or $100,000. The provision in the new bill would change that limit to 5% for all issues.
Several lawyers said the change would help large issuers who are currently unable to use the exemption. "One hundred thousand dollars is not 5% of most of the issues we deal with," said the Boston lawyer. "This really gives you a number you can deal with."
But Mr. Weiner disagreed, saying the provision "will only have a marginal effect because people were just ignoring [the current law provision for a de minimis amount] and going down to zero."
Industry officials and lawyers were concerned about the narrowness of another provision, which ends a requirement that two bond issues paid from substantially the same source of funds be treated as the same issue if they are issued within 31 days of each other.
They noted that the provision appears to apply only to cases where a cash-flow borrowing is twinned up with a long-term bond. The provision shuts out cases where an issuer might, for example, finance one project with a long-term bond subject to the alternative minimum tax and another not subject to the minimum tax, they said.