WASHINGTON -- The Treasury Department gave mixed reviews to Rep. Dan Rostenkowski's tax-exempt bond simplification bills yesterday and warned that one of his provisions could open the door to arbitrage-driven abuses.

Kenneth W. Gideon, assistant Treasury secretary for tax policy, told Congress he did not object to most of the bond provisions but was concerned about one that would allow an issuer to opt out of the arbitrage rebate requirement a few years after a bond was issued and instead restrict the yield on investments.

He also said the Treasury opposes as essentially useless another provision that would give it authority to waive bond reporting requirements for income taxpayers.

Mr. Gideon was testifying before the House Ways and Means select revenue measures subcommittee. He spoke on the tax-exempt bond provisions of a simplication bill introduced jointly by committee Chairman Rep. Rostenkowski, D-Ill., and Sen. Lloyd Bentsen, D-Tex., and on a separate simplification bill sponsored only by Mr. Rostenkowski.

In the separate bill, Mr. Rostenkowski proposed ending the confusion issuers often have in trying to comply with overlapping arbitrage rebate and yield-restriction rules by stopping the rebate requirement at the end of the so-called "temporary period." The term refers to the period -- usually three years -- after a bond is issued when an issuer is exempted from the requirement that the yield on investments be restricted to 0.125 percentage points over the yield.

"We do not believe this proposal accomplishes significant simplification," Mr. Gideon said. He added that it "could lead to abuse," because an issuer who opts to end his rebate liability at the end of the temporary period and pay what rebate he owes up to that point is not calculating the actual yield to maturity on the bond issue when computing the rebate payment.

The municipal bond community, meanwhile, was split on the issue. A New York City official said the city strongly supports the provision, and the representative of a coalition of 19 issuer groups said the measure is a step in the right direction. But the National Association of Bond Lawyers opposes it.

The New York official and issuer representative said they favored the idea of ending the rebate requirement at some point during the life of the issue, but the lawyers group said that ending it in favor of complicated yield-restriction rules would not result in simplification for issuers.

On the subject of allowing the Treasury to waive reporting requirements, Mr. Gideon said the department is opposed because it does not envision instances where the Treasury could forgo collecting income tax data on bond holdings.

"Given the need for this data in tax administration, we see little likelihood that this authority could be exercised to reduce issuer compliance burdens in any significant way," he said.

The issuer groups said they also are against waiving the requirement.

"We question the advisability of this change when so much importance and emphasis is being placed on the revenue implications of policy changes without more more information about the rationale for the change," said Lynn Hampton, chief financial officer of the Metropolitan Washington Airports Authority, who testified on behalf of the 19 issuer groups.

Mr. Gideon also said the Treasury supports two provisions in the bill introduced jointly by Mr. Rostenkowski and Sen. Bentsen, chairman of the Senate Finance Committee, Mr. Gideon said. One would ease the arbitrate rebate requirement for bona fide debt service funds, and another would expand the six-month exemption from the rebate requirement to an issuer who has spent 95% of proceeds within that period. To qualify for that exemption, an issuer would have to spend the other 5% within the next six months.

On several other provisions of both bills, Mr. Gideon did not offer the Treasury's support, but said the department would not object to them if lawmakers wanted to approve them.

One would automatically extend the temporary period for certain bonds for one year as long as the issuer has spent 85% of the proceeds and expects to spend the other 15% in one year. Another would end the requirement that two bond issues paid "from substantially the same source of funds" be treated as the same issue if they are issued within 31 days of each other, as long as one of the issues is a tax and revenue anticipation note.

The bond community was divided over the idea of easing the so-called 31-day rule. New York City strongly supports the provision, because as a large issuer with seasonal financing needs, the city has often "been in the position that it would like to market most note and bond issues in the same month," said Mark Page, deputy director and general counsel for the city's Office of Management and Budget.

Ms. Hampton said her coalition supports the provision, but believes it does not go far enough. She suggested the provision be broadened to allow multiple short-term borrowings in the same month, as well as issuance of bonds subject to the alternative minimum tax in the same month as non minimum-tax bonds.

But the bond lawyers' group strongly criticized the provision, saying it was unneeded because current law already is widely interpreted as allowing Trans to be issued in the same month with longer-term bonds without the two issues being counted as one.

The provision attempts "to address a problem that, in fact, does not exist" and may actually cause harm because it "creates a cloud for numerous existing and pending financings" that are being done using the current interpretation of the law accepted within the bond law community, said Richard Chirls, president of the National Association of Bond Lawyers and a partner with Orrick, Herrington & Sutcliffe.

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