WASHINGTON -- Citing revenue constraints, Rep. Dan Rostenkowski has dropped two major tax-exempt bond provisions from simplification legislation that the House Ways and Means Committee may vote on next week.

The Illinois Democrat, who chairs the Ways and Means panel, eliminated a provision that would increase to $10 million from $5 million the exemption from the arbitrage rebate requirement. Also gone from the bill is a provision repealing the requirement that no more than 5% of the proceeds of an issue go toward uses that are "disproportionate and unrelated" to the purpose of the issue.

An Oct. 21 memo from Rostenkowski that was sent to committee members and obtained by The Bond Buyer states that the two provisions were dropped "because of revenue constraints." The memo offers no details on the cost of the items, but municipal lobbyists said they understood that taken together the two would cause nearly $500 million in revenue losses for the federal government over five years.

Although the bill still includes a few minor bond changes, the dropped items represented the only major proposals to ease tax-exempt bond curbs in the bill, which Rostenkowski first introduced Jan. 5.

Elimination of the two provisions came as an unwelcome surprise to some municipal lobbyists. "You could take it as a slap in the face," said a lobbyist who asked not to be identified. The two provisions "have been through the wringer 10 times over, and everybody feels comfortable with them," the lobbyist said.

The House, in fact, voted twice last year to approve legislation containing the increase in the arbitrage rebate exemption and the repeal of the 5% unrelated-use test. But the final versions of both bills were vetoed by President Bush because of disputes with Congress over other tax provisions in the measures.

Other lobbyists said that any changes in the simplification bill at this point are probably meaningless, because the bill is not likely to be enacted this year. Although one staff member said the Ways and Means panel could vote on the bill next week, other congressional aides have said the committee is preoccupied with too many other issues to act on it in the remaining weeks of the congressional session.

Even so, the lobbyists acknowledged that leaving out the two bond provisions could set a frustrating precedent for future efforts to get them enacted.

"I don't know that it's the end of the world, but just on general principle, we would rather be in [a bill] than not be in," said Milton Wells, the director of federal relations for the National Association of State Treasurers.

Keeping the provisions in the bill could have been "cited as a sign of support next year," Wells said.

Earlier this month, congressional aides said that the simplification bill, known as H.R. 13, would probably have to be scaled back to keep its cost down. As originally introduced, the bill was estimated to cause a $1 billion loss in revenue for the federal government.

Aides said Rostenkowski had drafted revenue raising items to offset $500 million of the cost, leaving $500 million in items that would have to be stripped from the bill. Lobbyists said that dropping the two bond items appears to cover most or all of that amount.

A few minor bond provisions, remain, which would: * Clarify that transactions in which state or local governments prepay equipment purchases are eligible for tax-exempt financing if certain conditions are met; * Expand the six-month exception from the arbitrage rebate requirement to an issuer that spends 95% of proceeds within that period and spends the other 5% in the following six months; * Ease requirements for bona fide debt service funds under the 1989 arbitrage rebate relief law.

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