WASHINGTON -- The Senate Finance Committee's plan to expand the use of tax-exempt bonds in enterprise zones appears to be more workable than the plan passed by the House, though that proposal has its advantages, municipal lobbyists and bond lawyers said yesterday.

The Senate itself probably will not take up the Finance Committee's urban aid package until next week, congressional aides said. The chamber has been bogged down by a group of appropriations bills it is trying to pass before adjourning for a month-long recess on Aug. 13.

Both the House and Senate urban aid bills propose the creation of enterprise zones, distressed areas where tax incentives would lure new business or keep existing ones. But the two bills take markedly different approaches in the way they would expand the use of municipal bonds in the zones.

The Senate panel's measure would create a new category of exempt-facility bond to finance enterprise zone businesses. The bonds would be bank-eligible, regardless of the size of the issuer, and 50% of each issue would be exempt from the private-activity bond volume cap. The per business limit on the amount of bonds issued would be $1 million.

The House bill would not create an exempt-facility bond, but would change the rules governing qualified redevelopment bonds so they could be used in enterprise zones.

Under current law, redevelopment bonds may be used only for clearing land, rehabilitating buildings, or improving infrastructure. Redevelopment bond proceeds must be repaid through tax revenues, and the bonds are subject to the private-activity volume cap.

The House bill would allow the proceeds to be used to make loans to businesses within enterprise zones. Loans would be capped at $2.5 million per business, but pooled bond issues would be permitted.

Under the proposal, an issuer would not have to pledge tax revenues to repay the bonds, but would provide its own guarantee or obtain a letter of credit or bond insurance. In addition, 50% of the issue would be exempt from the private-activity volume cap.

Several lobbyists said they saw three major advantages in the Senate approach. First, they said, there are pitfalls in structuring enterprise zone bonds as qualified redevelopment bonds, as the House bill proposes. The tax code contains a host restrictions on the use of redevelopment bonds that make them unworkable now, and cause few states and localities to issue them, those sources said.

The Senate approach of creating a new exempt-facility bond "appears at first blush to be a fairly straightforward, easy way to implement and operate the program," said Guy Land, a lobbyist for the Council of Industrial Development Bond Issuers. That approach, he added, "is unencumbered with bureaucratic restrictions."

Secondly, banks would be encouraged to buy enterprise zone bonds under the Senate proposal because the bonds would be bank-eligible. Under current law, banks may deduct 80% of the carrying costs of debt purchased only from small governmental issuers.

Making the bonds eligible for purchase by banks "is a big key as far as I'm concerned," said David Chesnut, managing partner of Chesnut & Livingston in Doraville, Ga. Mr. Chesnut is general counsel to a number of bond-issuing authorities in Georgia.

Mr. Chesnut listed more than a dozen small-issue industrial development bond deals in Georgia that his firm was involved in during the late 1970s and early 1980s, before Congress denied bank eligibility to IDBs. Each deal involved an issue of less than $1 million, and each was estimated to have created 20 or more jobs, he said.

By encouraging banks to purchase the bonds, "you make it where you can turn these things out at a reasonable price, and if you do that, then we can get the jobs back into where they're needed," Mr. Chesnut said.

The third advantage to the Senate proposal is that it would presumably be available in more areas of the country than the House plan, lobbyists and lawyers said. Although the Senate Committee proposal envisions only 25 enterprise zones to the House's 50, the Senate panel also proposes that the bond component of its plan be used in areas that would qualify to be enterprise zones, even if they were not officially designated as such.

But the House approach has its advantages as well, the lobbyists and lawyers said. For instance, the House bill has a per business limit more than twice that of the Senate panel's proposal.

"Probably the House's recognition of a slightly higher level of financing is more realistic," Mr. Land said.

In addition, the House bill allows pooled issues, while the Senate measure does not appear to, lobbyists said. The lower per business amount, coupled with the inability to combine several issues, are also drawbacks to the Senate plan, they said.

Individual bond issues would be "ridiculous for a million-dollar deal," said a lobbyist who asked not to be identified. "Transaction costs are huge. It doesn't make it economically feasible at all."

Despite the differences between the two bills, however, "the important thing to underscore is that both approaches recognize the value of tax-exempt financing to stimulate economic growth in these areas," Mr. Land said.

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