WASHINGTON -- The tax-exempt bond market is facing a ticking time bomb.
Estimates of the federal revenue losses from proposed tax-exempt bond provisions have always been the nemesis of the municipal bond market.
But a new system for "scoring" the cost of legislative proposals that is just going into effect could be even more of a detriment to the market and could jeopardize the long-awaited easing of some of the 1986 bond curbs, either as part of this year's health care reform measure or in future tax bills.
For the first time this year, the Senate and, in effect, the House are calculating the cost of tax code provisions over a 10-year period, rather than the five-year period used in the past.
The new system, which is the result of a little-noticed provision in last year's Senate budget resolution, came to light about 10 days ago when the House Ways and Means Committee was rushing to complete work on its version of health care reform legislation.
Rep. Charles Rangel, D-N.Y., and Rep. Peter Hoagland, D-Neb., had been poised to offer amendments that would repeal the $150 million cap only on the outstanding debt of nonhospital health care organizations.
But the items were never considered by the panel because estimates showed that federal revenue losses for the partial repeal would be extremely high, totaling $400 million to $600 million over a 10-year period, depending on whether nursing homes were included, sources said.
The sources also said that the health bill is being scored according to 10-year cost estimates, rather than the usual five years, because the health care measure is to be phased in over 10 years.
However, other sources said the budget provision adopted by the Senate last year calls for 10-year estimates to be used for all future tax measures as well.
While the House did not adopt that provision and will still use five-year tax estimates for its own legislation, it also will have to calculate the costs over a 10-year period so that it has comparable numbers to use when it negotiates final tax bills in conference.
That means 10-year scoring will become standard for all tax measures. But tax-exempt bonds will not fare well under the 10-year system because the costs of bond provisions multiply in the out years as more bonds are being issued while the bonds issued in the earlier years remain outstanding.
For example, estimates showed Rangel's amendment costing $85 million over five years, if nursing homes were not included, compared with the estimate of $400 million over 10 years.
Cost estimates for the Senate Finance Committee's health care bill have not been released, but the provision long sought by the bond market that would repeal the $150 million volume cap on all 501(c)(3) bonds could end up costing $2 billion or more over 10 years -- a cost that could endanger the provision.
Ten-year estimating is going to make the task of lobbying Congress to ease the bond curbs much more difficult.