WASHINGTON -- Congressional tax writers took two important steps in the last week to prevent distortions in the treatment of tax-exempt bonds.
Both steps came when leaders of the House and Senate tax panels acted on two bond proposals that proponents want to have attached to the pending health care reform legislation.
In one case, Sen. Daniel Moynihan, D-N.Y., the chairman of the Senate Finance Committee, moved to eliminate a potential distortion that would be created by a proposal being pushed by the Public Securities Association and a group of 501(c)(3) organizations.
Those two groups want the $150 million limit on the amount of bonds individual nonhospital 501(c)(3) organizations can have outstanding lifted from health care institutions. They argue, and with justification, that the limit would impede mergers and consolidations needed under health reform because many of the health care institutions created would not conform to the definition of a hospital and would therefore not be exempt from the limit.
But changing the limit to benefit just health care facilities would be unfair to private colleges and universities and other nonprofit organizations that don't provide health care services, but do provide equally valuable public services.
So rather than just lifting the cap on health care institutions, Moynihan went one step further and proposed eliminating the cap on the outstanding debt of private universities and colleges, museums, housing organizations, and all other private nonprofit organizations with the 501(c)(3) designation.
Moynihan's move, which was expected because of his long-standing support for nonprofit groups, especially private universities, is a wise one.
It makes little sense to deal with only part of the limit on 501(c)(3) bonds during the health care debate. The entire limit should be dealt with at the same time to prevent the creation of distortions in the market.
In the other case, Rep. Sam Gibbons, D-Fla., the acting chairman of the House Ways and Means Committee, made a wise move when he refused to include a proposed federal guarantee for certain kinds of tax-exempt hospital bonds in the health care bill he proposed last week.
The proposal, which was included in the health reform bill drafted in March by the committee's health subcommittee, is designed to help areas that have insufficient access to health care services.
While it is hard to argue against improving access to health care, it makes no sense to create a special exemption from the 1984 federal law that prohibits federal guarantees of tax-exempt debt because the exemption would create one kind of municipal bond that is superior to another. Such preferential treatment would merely drive up borrowing costs for other issuers.