WASHINGTON -- The odds that Congress might approve legislation next year to ease some of the curbs on tax-exempt bonds appear to be going from bad to worse.

Municipal market participants had hoped that President Clinton might propose as early as this month a legislative plan for financing infrastructure improvements that could include proposals to ease the curbs on tax-exempt bonds.

When the Republicans took control of Congress for the first time in 40 years in last month's elections, many in the market hoped that proposals to ease the bond curbs could be attached to a GOP tax cut bill next year.

But there have been several developments recently within both the Clinton Administration and the Republican-controlled Congress that represent setbacks for bonds and indicate the outlook for bond legislation next year is decidedly dim.

With the White House now scrambling to come up with its own tax cut plan, lobbyists say administration attempts to develop an infrastructure financing plan to include in the president's fiscal 1996 budget plan are in disarray and may be dead.

Administration officials are still interested in the infrastructure issue, but have stopped working on it because they have turned their attention to developing a tax plan and figuring out ways to pay for it, some lobbyists say.

If that isn't enough of a setback, Labor Secretary Robert Reich recently floated a trial balloon when he gave a speech, calling for the elimination of special tax benefits for industries, that suggested scrapping the tax exemption for private-activity bonds. While killing off private-activity bonds has been suggested and rejected many times in the past, any such suggestion represents a potential danger when Congress is trying to find revenue to fund a tax cut.

Another potential setback came when the Office of Management and Budget proposed terminating the fledgling housing preservation program and making sharp cuts in the Section 8 rent subsidy program -- moves that would hurt both existing and proposed bond issues.

At the same time, the GOP tax cut juggernaut appears to be picking up speed. Beside the "Contract with America" that calls for a series of middle-income tax cuts, Republicans have started proposing various tax plans ranging from across-the-board cuts to a flat tax.

Not only would those tax proposals make tax-exempt bonds less attractive as investments, but they are so expensive that Congress wouldn't have the revenue to pay for easing the bond curbs.

Worse yet, they might prompt Congress and the administration to propose new curbs on bonds to help pay for the broader tax cuts.

The outlook for municipal bonds next year is decidedly gloomy, and the market may find itself fighting just to keep what it has.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.