WASHINGTON -- The Senate Finance committee approved legislation yesterday that would require mark-to-market accounting of securities, which bond industry officials warn could hurt demand for municipal bonds.

The proposal, effective for the current tax year, would require securities firms to report for tax purposes the market value of municipal bonds and other securities they hold in their inventories.

Firms must already mark to market for accounting purposes, but for tax purposes they may choose whether to report the market value or face value of their securities.

The Public Securities Association has warned that the proposal, if enacted, could cause firms to dump large amounts of tax-exempt bonds just before the end of a tax year to avoid tax losses.

In a June 10 letter to Sen. Lloyd Bentsen, D-Tex., chairman of the panel, the association reiterated its concern, saying the provision "could result in tax-motivated decisions on the part of securities dealears and could make dealers marginally less willing to take positions in certain securities, thus resulting in a loss of market liquidity."

A decrease in liquidity "could mean higher interest rates for borrowers who are dependent on the public securities markets," the letter states.

The mark-to-market measure was one of several revenue-raising items the committee approved as part of a bill to extend emergency unemployment benefits. Extending the benefits, which are scheduled to expire next month, would cost the federal government $5.4 billion over the next five years, and the committee needed to make its proposal revenue-neutral. The mark-to-market proposal would raise nearly $2.5 billion over that period.

The mark-to-market proposal first surfaced early in February in President Bush's budget proposal for fiscal 1993, which begins Oct. 1. Later in February, the House Ways and means and Senate Finance committees added it to their tax packages, and it survived into the final version of the bill that the President ultimately vetoed.

Last week, Bush administration officials suggested using the proposal to pay for legislation that would create enterprise zones for urban development.

The proposal the committee approved yesterday is more onerous than the one it approved as part of its March tax bill. At that time, the committee proposed that the measure go into effect for the 1993 tax year. Now, however, the panel is proposing that it become effective this tax year. A Senate aide said the change was made to gain additional revenue.

Along with the unemployment bill, yesterday's drafting session originally was to entail a vote on extensions of tax provisions set to expire June 30, including the tax exemptions for mortgage revenue bonds and small-issue industrial development bonds. But the panel postponed that vote until Tuesday.

During yesterday's meeting, Sen. Robert Dole, R-Kan., said House and Senate leaders are trying to put together a tax package over the next few days that would contain an enterprise zone proposal, the extensions, and the repeal of a luxury items tax.

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