WASHINGTON -- The Senate Finance Committee approved legislation Wednesday night that would expand the use of private-activity bonds in enterprise zones, renew two expired bond programs, and ease a host of tax law bond curbs.
Committee Chairman Lloyd Bentsen, D-Tex., who proposed the bill, told reporters after the panel approved the measure that he hoped the full Senate could take up the legislation next week.
But tax aides and lobbyists said the Senate may not have time to debate the bill before adjourning for a month-long recess on Aug. 13. Senate leaders want to complete action on a number of appropriations bills early next month and may be wary of putting a time-consuming tax bill on the Senate floor, they said.
The committee made no changes to the bond provisions of Sen. Bentsen's bill, which had been widely circulated early this week. But the panel did modify a section of the bill designed to force the Internal Revenue Service and the Treasury Department to move more quickly on publishing tax regulations.
The provision, as offered by Sen. Bentsen, would require that the effective dates of temporary and proposed regulations be no earlier than their publication dates in the Federal Register or in a public notice. Under the provision, however, the Treasury would still be permitted to issue retroactive regulations to prevent tax law abuses.
The committee amended the provision to allow the Treasury to make any temporary and proposed regulations retroactive as long as the regulations are published within 12 months after legislation is passed.
The core of the overall package approved by the committee is a proposal to create 25 enterprise zones, economically distressed areas where tax incentives would be offered to start up businesses or firms that wanted to relocate to the areas.
One of the tax incentives in the panel's plan would permit issuance of a new category of exempt-facility bond, the proceeds of which could be used to purchase land, buildings, and equipment used by enterprise zone businesses, but not by housing facilities.
Bonds issued for enterprise zone businesses would be bank-eligible, regardless of the size of the issuer, and 50% of each issue would be exempt from the private-activity volume cap.
Proceeds of enterprise-zone bonds would have to be spent within 18 months, and the limit on the amount of bonds issued per business would be $1 million.
The panel also proposed allowing the bond component of the enterprise zone plan to be permitted in any distressed area that met the same qualifications as a zone, even if it was not one of the 25 that received the formal enterprise zone designation.
Municipal market participants roundly praised the plan.
"This creative use of bonds will result in job creation and economic development in those areas of the country most in need of economic relief," the Public Securities Association said in a letter to the panel.
Six associations representing state and local interests told the panel in a letter that they were particularly pleased that enterprise zone bonds could be sold as bank-qualified debt.
"This vastly simplifies the borrowing process, reduces the cost of borrowing, and should insure that local banks will make loans to distressed areas in their states," the letter says.
Signers include the Government Finance Officers Association, the National Association of State Treasurers, and the National League of Cities.
The groups praised the bill's proposal of easing limits on banks deductibility outside of those distressed areas. Under current law, banks are allowed to deduct 80% of the cost of carrying tax-exempt bonds if they are purchased from an issuer who expects to sell no more than $10 million annually. The bill would raise that limit to $25 million and would make pool bonds eligible to be bank-qualified debt.
Meanwhile, bond industry officials were uncertain about the effects of the committee proposal for the effective dates of IRS regulations. Most were pleased with the philosophy behind it, which is that the Treasury and the Internal Revenue Service have to issue regulations in a more timely fashion. At the same time, they were concerned that there could be some major practical problems in trying to implement such a proposal, such as agencies' lack of time to consult with the industry.
"It's a double-edged sword," said Milton Wells, director of the National Association of State Treasurers' office of federal relations. On the one hand, he said, such a proposal would prevent a repeat experience of an incident in 1989 when the Treasury finally issued overly complicated rebate rules almost three years after the rebate requirements were enacted. On the other hand, he said, "We might not be able to have as much input in explaining what the real world situation is."
"It's good and bad in some ways," agreed Catherine Spain, director of the federal liaison office for the Government Finance Officers Association. If the Treasury and the IRS are under time pressures, she said, "they might not do as good of a job in terms of talking to people" about rules.
She also winced at the possibility that such a proposal might lead Congress to enact more detailed legislative proposals as a precaution against agencies not issuing rules within the required time frame.
The two-year rebate relief law, she said, was "a good idea" that got "mangled" in the legislative process. Industry officials have complained that the law is overly complex and restrictive.
She also said it is easier to talk to agency officials than members of Congress about bond proposals. "You can't go to members of Congress and talk technical issues like you can with the Treasury staff," she said.
Some industry officials, however, said this proposal may not have much of an effect at all. Micah S. Green, executive vice president of the Public Securities Association, said most industry officials are not going to ignore legislation that has been enacted, no matter when the Treasury issues rules implementing that legislation.
"From a practical standpoint, the date of enactment is the relevant date in terms of getting a good bond opinion," he said, adding that sometimes legislation is retroactively effective.
Another provision in the bill would remove the $150 million limit on the amount of bonds that individual 501(c)(3) entities other than hospitals may have outstanding at one time. The proposal also would reclassify 501((c)(3) bonds as governmental bonds.
The committee's bill would also renew the tax exemptions for mortgage revenue bonds and small-issue industrial development bonds and the low-income housing tax credit, and extend them through Dec. 31, 1993. The three are among a dozen tax breaks that expired June 30.
On the negative side for the municipal market, the legislation includes a provision requiring securities firms to report, for tax purposes, the market value of municipal bonds and other securities they hold in their inventories.
Another provision in the bill could weaken demand for bonds that state and local governments market to parents to save for their children's college education, so-called college saver bonds.
The provision would expand a 1988 law that allows taxpayers with incomes below a certain level to exclude from gross income the full amount of interest earned on Series EE U.S. savings bonds if they redeem the bonds to finance college expenses of their own children. The provision would waive the income limitations and allow taxpayers to use bond proceeds to finance college expenses of students other than their own children.