WASHINGTON - If anyone tells you that states are allowed to allocate the greater of $50 per capita or $150 million under the private-activity bond volume cap each year, don't believe them.

It's really the greater of $41.25 or $120.8 million.

Was there a misprint in the 1986 volume cap law? No, $41.25 and $120.8 million are inflation-adjusted figures, a point that a top official of the Public Securities Association raised last week in testimony presented to a House Ways and Means subcommittee hearing.

"In real terms, the value of volume caps actually decreases each year." R. Fenn Putman, the vice chairman of PSA and a managing director at Lehman Brothers, told the subcommittee on select revenue measures.

"Without any conscious federal policy decision, the value of state volume caps has fallen by nearly 20% in just five years," Putman said in his statement. "Under current law, inflation will continue to erode their value, and fewer and fewer projects will be able to be financed."

When Congress was drafting the Tax Reform Act of 1986, little thought was given to how assigning a constant-dollar figure to the volume cap would cause it to lose value in subsequent years. The law mandated a $75-or-$250 million cap in 1987, which dropped in 1988 to the current $50-or-$150 million limit.

Indexing the cap for inflation would "take some of the pressure off and provide a mechanism for the volume cap to keep pace with rising construction costs and increased financing needs," said Aurel Arndt, the general manager of the Lehigh County Authority in Allentown, Pa. Arndt was also testifying before the subcommittee, representing a dozen state and local organizations.

Inflation's erosion of the volume cap is just one facet of a larger problem Putman and Arndt brought out in their testimony: that the cap is simply too tight in many states. Though lobbyists have complained a bit during the past few years, there has been little talk of the problem on Capitol Hill and no concerted lobbying effort to ease the cap.

That's because the two biggest users of the cap, issuers of mortgage revenue bonds and small-issue industrial development bonds, have been fighting for their lives. Each year they have faced a termination date for those exemptions and have been busy trying to keep them from expiring. This year, the situation is even more acute, with the two tax breaks having expired June 30, 1992.

Mortgage bond and IDB proponents probably would have more time to pursue the volume cap issue if Congress made the authority to issue those bonds permanent. There is a chance that could happen this year, as the House version of President Clinton's budget and tax package includes permanent extensions. The Senate bill, however, would renew the two exemptions only through June 30, 1994.

But with or without a permanent extension, the testimony last week by Arndt, Putman, and other bond proponents at the subcommittee hearing is a sign that lobbyists are stepping up the pressure on Congress about the volume cap's restrictions.

Evidence that at least some are listening can be found in a proposal by Rep. Fred Grandy, R-Iowa, to alleviate some of the pressure on the volume cap. Grandy's proposal would allow states with an overabundance of cap authority to shift the authority to states that had used up their cap in a given year.

Grandy's proposal was on a list of nearly two dozen proposals for easing curbs on tax-exempt bonds submitted for the subcommittee hearing. Overall, members have made more than 100 tax-related proposals that they hope will be folded into a second tax bill this year.

Although Putman cited Grandy's proposal as one alternative that could be explored, he criticized it as probably involving "significant administrative burdens."

The Treasury Department is none too happy with the idea, either, saying it would cost the federal government money and would be a burden on the Internal Revenue Service.

But Grandy's proposal is a start, and probably only the first of many approaches to easing the volume cap - such as indexing it for inflation - that bond proponents now seem ready to push on Capitol Hill.

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