WASHINGTON -- A top House tax lawmaker yesterday sharply criticized a plan for ending the cap on some outstanding 501(c)(3) bonds, while the Clinton Administration declined to throw its support behind the proposal.

"The proposal is not only unwise, it is unnecessary," said Rep. Pete Stark, D-Calif., a senior member of the House Ways and Means Committee. Stark was referring to a proposal that would eliminate the $150 million cap on the amount of bonds that 501 (c)(3) health care organizations, other than hospitals, may have outstanding at one time.

By permitting increased issuance of private-activity bonds, the proposal "is a first step down the wrong course," Stark told a joint hearing of the Ways and Means Committee's subcommittees on select revenue measures and on oversight.

Many projects financed by private-activity bonds in general, and health care bonds in particular, "are promoted by bond houses and not by strong financial needs," said Stark, who is chairman of the Ways and Means Committee's subcommittee on health.

Stark said the overcapacity in hospitals and the run-up in health care costs can be partly attributed to bond-financed health care projects that were not needed but "were stimulated by overzealous bond salesmen."

The Clinton Administration, meanwhile, told the subcommittees it would not oppose the 501(c)(3) bond proposal but has some reservations about the measure.

Glen A. Kohl, the Treasury Department's tax legislative counsel, said the administration believes the proposal "prOvides important benefits, particularly with regard to health care reform."

But Kohl added that the administration is concerned that "the proposal may result in a greater than optimal percentage of health care resources being spent on capital intensive activities."

Another concern is the administration's overall reservation about tax-exempt bonds, which Kohl said are viewed as "an inefficient means of providing a subsidy when compared to more direct programs such as grants and direct loans."

"This is not our initiative, but we will not stand in the way" of its passage, provided Congress passes measures that would offset the expected revenue loss to the federal government of the provision, Kohl said.

The proposal for ending the $150 million limit on health care facilities was championed earlier this year by Rep. Charles Rangel, D-N.Y., who chairs the select revenue measures panel. But the Ways and Means committee decided not to include the plan in its health care reform bill because the proposal was estimated to cost the federal government between $400 million and $600 million over the next 10 years.

Other tax lawmakers at the hearing said they support lifting the $150 million cap, including Rep. Peter Hoagland, D-Neb., and Rep. Mel Hancock, R-Mo.

But Rep. J.J. Pickle, D-Tex., the chairman of the oversight subcommittee, said he was skeptical about the need for lifting the cap, and in fact raised the idea of going in the other direction and placing the $150 million cap on hospitals, which are exempt.

In response to Pickle's suggestion, Stark said he might be in favor of such a move, but urged caution because an across-the-board imposition of the cap might hamstring the flexibility of some large hospitals that need bond financing.

Rep. Jim McCrery, R-La., said Congress should be cautious before attempting to eliminate the $150 million cap.

"I'm not sure that's wise policy" given the need to contain health care costs, he said. "I think we ought to be very careful before we use the tax code to drive actions in the [health care] sector."

Rangel had argued that the $150 million cap would prevent nonhospital health care facilities from restructuring even though they may need to do so to survive health care reform.

The Senate Finance Committee not only adopted Rangel's idea but took it a step further. On July 2, the committee approved a health care bill that included a provision to eliminate the cap on all nonhospital 501(c)(3) organizations, including colleges and museums.

The Finance Committee's proposal also would remove a host of post1985 restrictions on 501(c)(3) bonds, in an effort to put them more on a par with governmental bonds.

Last week, Senate Majority Leader George Mitchell, D-Maine, introduced a new reform bill that combines a number of provisions from various committees, including the finance panel's 501(c)(3) bond provision.

On the House side, Majority Leader Richard Gerhardt, D-Mo., has also introduced a new health care bill that is an amalgam of a number of measures, but that bill does not contain the 501(c)(3) bond measure.

The Senate was scheduled to begin debate on Mitchell's bill yesterday, and the House is expected to take up Gephardt's measure next week.

Rangel said the fate of the 501 (c)(3) provision will ultimately be resolved when House and Senate conferees eventually meet to craft a final reform bill. He urged Treasury officials to prepare themselves for the conference by developing a position on the provision that spells out what they would most like to see passed.

For example, the administration should be ready to say if it wants the provision targeted only to certain types of health care institutions, Rangel said.

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