WASHINGTON - In 1989 Gov. Bill Clinton of Arkansas was recommending easing tax law curbs on municipal bonds while the newly elected President Bush was advocating the elimination of some forms of tax-exempt debt.

Three years later, Gov. Clinton is still calling for changes in the tax law to benefit bond issuers. But President Bush has moved dramatically closer to his opponent's position, in what some would call an election year conversion.

Normally, presidential candidates pay little or no attention to state and local finance. But this year infrastructure is a hot topic in Washington and the Los Angeles riots have politicians looking hard at urban problems. For the first time in recent memory, it's possible to compare what the two nominees are doing and saying about municipal finance.

Municipal market participants "find it exciting that part of the debate by both candidates is infrastructure, economic development, and the needs of states and localities," said Micah S. Green, the executive vice president of the Public Securities Association.

Mr. Clinton's record as governor and his work on the Anthony Public Finance Commission pegged him as a long-time supporter of tax-exempt bonds. He had not, however, talked about them during the primary season, except to endorse the preservation of the tax exemptions for mortgage revenue bonds and small-issue industrial development bonds.

But that reticence changed in June, when he addressed the U.S. Conference of Mayors.

In his speech to the mayors, Gov. Clinton said he strongly supported the recommendations of Rebuild America, a coalition of more than 50 public and private organizations interested in fostering infrastructure improvements.

The coalition, formed last year, has called on the federal government to do five things: ease tax law restrictions on the amount of private participation allowed in infrastructure projects financed with governmental bonds, increase the supply of bank-eligible bonds, create a "tax-exempt municipal savings bond" sold in small denominations to encourage average citizens to invest in infrastructure, expand the use of bond-financed state revolving loan funds, and create a Federal Infrastructure Bond Bank to provide credit enhancement for state and local,infrastructure bonds.

Gov. Clinton told the mayors that as President, he would increase federal spending on infrastructure by $20 billion a year. The Rebuild America Coalition "has recommended a number of things which can be done to leverage more local money and private sector money with this $20 billion commitment, including state revolving loan funds for many projects, and a federal infrastructure development bank," he told the mayors' group.

"I support the recommendations of the Rebuild America Coalition, and I will work hard to leverage this money so that we can generate even more investments and create more jobs," Gov. Clinton added.

Aside from the Rebuild America recommendations, Gov. Clinton would fight to retain the overall tax exemption for municipal bonds as they are used to finance public purposes, Robert Shapiro, an economic adviser to the governor, said in a recent interview.

"I don't think there is any doubt the governor supports" maintaining the tax exemption for municipal bonds, said Mr. Shapiro, who is also vice president of the Progressive Policy Institute, a Democratic think tank.

"This is a long-term, proper [financing] mechanism that is now built into the capital structure, and it is beyond my imagination that there would be any change in that" he added.

That pledge is borne out by the governor~s involvement in the creation of the Arkansas Development Finance Authority, which encouraged investment in housing and small business through bond financing, said Amy K. Dunbar, the director of governmental affairs for the National Association of Bond Lawyers.

"You know he's got a commitment to local municipal finance issues. He's got a track record on it," she said.

A Capitol Hill insider says Gov. Clinton's endorsement of Rebuild America shows he has "a strong awareness of the value that tax-exempt finance can play in getting capital into areas that need capital."

That awareness "flows from the direct experience of a governor who has to deal, on a daily basis, with problems that businesses in his state face, and communities as well, who need access to capital either for public improvements or for economic growth," he said.

While Gov. Clinton's views on tax-exempt finance have held steady, President Bush's position seems to have undergone a marked change, when public statements by administration officials in 1989 and 1960 are compared with bond proposals the President has offered this year.

When President Bush took office in 1989, he appeared to wholeheartedly embrace the Reagan administration's opposition to the use of tax-exempt bonds. In March of that year, a Treasury Department official told Congress that the Bush administration strongly opposed continuing the tax exemptions for mortgage bonds and small-issue IDBs, which were scheduled to expire at the end of that year.

Policy Changes

The official, Treasury tax legislative counsel Dana Trier, had parttcularly strong words for the mortgage revenue bond program during his testimony to the Senate Finance Committee. "The qualified mortgage bond program is the least cost-effective means of providing federal assistance to owner-occupied housing and does not provide sufficient assistance to those who may need to justify its large cost," Mr. Trier said.

President Bush believed the exemption is an "unnecessary, inefficient, and very expensive" way of assisting first-time home buyers, he added.

By the next year, the Treasury had toned down its rhetoric somewhat, but still did not favor continuing the mortgage bond and IDB exemptions.

In March 1990, Kenneth Gideon, who at the time was the Treasury's assistant secretary for tax policy, told the finance committee that "there is some degree of reservation" within the Bush administration about extending the mortgage bond and IDB exemptions. President Bush "has some reservations about the efficiency of some of the tax-exempt bond programs," Mr. Gideon said.

But Mr. Bush appeared to soften his stance in 1991. Late that year, with the two bond exemptions and 10 other tax provisions again in danger of expiring, House Ways and Means Committee Chairman Dan Rostenkowski, D-I11., demanded the White House state its position on the tax breaks.

Treasury Secretary Nicholas Brady told Rep. Rostenkowski in a letter on Nov. 21 that "we would not oppose extension of any of the 12 expiring provisions." A few weeks later, the President signed legislation that continued the tax provisions through June 30, 1992.

In February of this year, Mr. Bush for the first time stated his support of mortgage bonds and IDBs in his budget message to Congress. He advocated 18-month extensions for the mortgage bond exemption and the exemption for IDBs sold to benefit first-time farmers.

President Bush went even further four months later, proposing an expansion in the use of tax-exempt bonds for the first time since he took office. As part of his enterprise zone plan, announced shortly after the Los Angeles riots, the President proposed creating a new type of exempt-facility bond that would be issued in the zones to make loans to small businesses. The bonds would need an allocation under the private-activity volume cap, but banks would be allowed to deduct 80% of the cost of carrying them.

Despite the apparent shift, however, a Treasury official said the President's views on tax-exempt bonds have not dramatically changed.

"This has always been our position: that tax-exempt financing incentives should only be extended after close scrutiny to make sure that the extension of those incentives makes economic sense," said the official, who requested anonymity.

"The conclusion was made in view of the present economic circumstances that the extension of those provisions [and the enterprise zone proposal] made sense," the official added. "We believe that if we are to encourage investment in these sectors of our economy that a broad variety of incentives and economic tools are necessary, and this would be one of a number of important tools we would look to."

Some lobbyists said they welcomed President Bush's proposals for easing bond restrictions, because they show the administration has come to realize that tax-exempt bonds are a useful public financing tool.

"It's quite clear the needs of states and localities have now become more evident to the White House, given the President's recent proposals regarding enterprise zones and expiring provisions," Mr. Green, the securities association official, said. "That evolution is an encouraging sign."

But one Capitol Hill insider said the President's about-face on the mortgage bond and IDB exemptions "is another manifestation of the fact that there seems to be no central core to the Bush presidency," he said.

"The administration's position has changed as Republican senators and governors have kept the pressure on to maintain these programs," he added.

Different Perspectives

Another municipal lobbyist also cast the President's change of heart on mortgage bonds and IDBs in a negative light. "This illustrates the confusion of the administration on almost all economic issues," said the lobbyist, who asked not to be identified. "They speak with many voices, and it's difficult to see where they stand on any issues."

But Ms. Dunbar, the official with the bond lawyers' group, said the President could not be expected to have the same perspective on state and local finance issues that Gov. Clinton has. Except for a two-term stint as Texas congressman from 1967 to 1971, President Bush has not held elective office at the state or local level. He was a businessman, and then served in such posts as ambassador to China and director of the Central Intelligence Agency before being elected vice president in 1980.

"Bush has none of the background to have experience on a personal level about the use of municipal finance." Ms. Dunbar said.

He has, however, advocated deregulation and simplification of federal regulations, which has spilled over into the bond area, Ms. Dunbar noted. She credited the Treasury Department and Internal Revenue Service under President Bush with being "much more responsive on the regulatory end of things than the Reagan administration was."

Municipal lobbyists said they believed both candidates, if elected President, would continue to hold their current positive view of municipal bonds and try to translate it into law, though they would face an uphill battle because of revenue constraints.

"I have no reason to believe" President Bush would shift his position on bonds, said Catherine L. Spain, the director of the Government Finance Officers Association's federal liaison center. "I think there has been a gradual improvement in the treatment accorded to bonds," and the pendulum will continue to swing in favor of municipal finance during a second Bush term, she said.

Ms. Dunbar said the President's promises to pay more attention to issues close to home will keep matters relating to bonds on the front burner. "If in fact he's going to focus on domestic policy, I would expect to see more activity in the bond area rather than less," she said.

Similarly, Gov. Clinton has stressed economic issues in his campaign, and if elected would have to focus on domestic areas that will involve municipal finance, Ms. Dunbar said.

"I think he'll have to put together a comprehensive game plan, and I would assume that will include proposals for the economy, which would include bond-related issues," she said.

Ms. Spain said a Clinton presidency would probably be even more aggressive in easing bond curbs than the Bush administration has been. "Things are already moving in that direction, but I think it would get an added boost if Clinton were President," she said.

But Ms. Spain added, "to the extent that revenues are still a major consideration, there will be limits."

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