WASHINGTON - The House Ways and Means Committee yesterday approved a tax simplification bill that contains a few minor provisions to ease tax-exempt bond curbs, but that does not include two major bond items that the municipal community wanted.

As expected, Committee Chairman Dan Rostenkowski, D-Ill., dropped the two items in an effort to minimize the bill's cost to the federal government.

One of the provisions would have increased to $10 million the $5 million small-issuer exemption to the arbitrage rebate requirement. The other would have repealed the so-called 5% unrelated-use test.

During debate on the measure, Rep. Ben Cardin, D-Md., said he was disappointed the two provisions were dropped and hoped they would be added to a future tax bill.

"A majority of the members are still interested in pursuing" enactment of those two provisions, Cardin said. "I hope we will not lose sight of that."

Rep. Fred Grandy, R-Iowa, asked Rostenkowski if there would be an opportunity in this session to draft a tax bill containing members' favorite amendments.

Rostenkowski said such a bill would be difficult to draft because, "The cupboard is bare. The revenues are gone."

The three bond provisions remaining in the bill include one that would ease requirements for bona fide debt service funds under the 1989 arbitrage rebate relief law. Another would clarify that transactions in which state or local governments prepay equipment purchases are eligible for tax-exempt financing if certain conditions are met.

The third provision would expand the six-month exception from the arbitrage rebate requirement to an issuer that spends 95% of proceeds within that period and spends the other 5% in the following six months.

Short-term prospects for enactment of the simplification bill are dim, according to congressional aides and lobbyists. Congress is expected to adjourn for the year before Thanksgiving, leaving almost no time for the Senate to draft its own version and reconcile that bill with the House committee's measure.

Over the longer term, municipal lobbyists said they are concerned about how the Ways and Means panel will treat the two provisions dropped from the bill the next time the committee drafts tax legislation.

It is unclear whether those items will still be considered uncontroversial simplification items endorsed by Rostenkowski, or if they will be relegated to more tenuous status and lumped in with the dozens of amendments proposed this year by various committee members.

"We would hope that their not being included [in the pending bill] for revenue reasons doesn't change their status as simplification items that can be considered separate and apart from what we'll call strict member items," said Micah S. Green, the executive vice president of the Public Securities Association.

The House voted twice last year to approve legislation containing the increase in the arbitrage rebate exemption and the repeal of the 5% unrelated-use test. But the final versions of both bills were vetoed by President Bush because of disputes with Congress over other tax provisions in the measures.

The first inkling of trouble for the two provisions came last week when Rostenkowski circulated a memo among committee members saying he planned to eliminate the provisions "because of revenue constraints."

The memo offered no details as to their cost, but lobbyists said they understood that the Joint Tax Committee was projecting the two would lose nearly $500 million for the federal government.

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