The Bond Buyer

May 12, 2004, Wednesday

SECTION: NEWS; Pg. 1

LENGTH: 1734 words

HEADLINE: Senate Set To OK $170B Tax Measure  
Contains More than 12 Muni Provisions

BYLINE: By Craig T. Ferris

DATELINE: WASHINGTON

BODY:
The Senate was on the verge last evening of approving the $170 billion corporate tax bill that contains more than a dozen mostly moderate-sized municipal bond provisions.

Although the bill stalled three times in as many months, the logjam was broken earlier yesterday when the Senate voted 90 to 8 to cut off debate on the measure under an agreement that allowed a vote on a controversial Democratic-sponsored proposal to extend expired unemployment benefits for 13 more weeks.

However, the jobless benefits extension was defeated when the Senate failed by one vote to approve a waiver of budget limitations needed to approve the $5.8 billion proposal. The measure needed a three-fifths majority, or 60 votes, to pass.

The Senate also rejected, by a vote of 89 to 13, a proposal to eliminate $14 billion in tax breaks included in the stalled energy bill that were added to the corporate tax break bill about a month ago - a move that preserves a couple of bond-related items that would benefit public power.

If the overall bill is approved, which now appears almost certain, it will go to the House, where its future is still up in the air because it is opposed by Democrats and because Republicans are divided on some of the proposed benefits for manufacturers. The House bill, which the Ways and Means Committee has been holding up pending Senate action, contains none of the tax-exempt bond provisions that are in the Senate measure, but there may be an attempt by Ways and Means to incorporate a couple of them before the bill goes to the full House.

The largest bond-related item in the Senate bill is a measure that would partially repeal the 10-year rule for single-family mortgage revenue bonds by eliminating it for future bonds and would provide a one-year exemption for outstanding bonds.

The package would also expand the definition of facilities eligible for industrial development bond financing, extend the use of Liberty bonds and the qualified zone academy bond program, temporarily expand the use of tax-exempt bonds for facilities based on Indian reservations, and create a two-year pilot project to allow nonprofit groups to use bonds to buy land and pay off the debt with funds from logging operations without violating the private-activity bond curbs.

It also incorporates bond-related items that were included in the slimmed-down $14 billion energy tax package that has been stalled in the Senate, including provisions that protect the ability of municipal utilities and state agencies to use tax-exempt bonds to prepay long-term natural gas contracts and allow public power utilities to sell tax credits from renewable energy production to private entities for cash.

A controversial provision would curb a certain type of tax-advantaged leasing transaction, called a sale-in, lease-out transaction or SILO deal, which has been a popular way for states and local governments to earn revenue to finance infrastructure projects such as transit and sewer systems. It would curb domestic deals as of Jan. 1, 2004, by flat-out preventing the use of tax-exempt bonds to finance SILO deals, add a new passive-loss provision that would make the deals much less attractive, and impose a requirement that firms have capital risk in the deals. It also would not protect the 15 pending municipal transportation deals that were put on hold in November.

It also would eliminate the tax advantage of SILO deals that involve foreign property as of Jan. 1, 2005, regardless of when the deals were entered into.

Another provision contains clarifications sought by The Bond Market Association to protect tax-exempt tender-option bonds from a revenue-raising measure designed to crack down on potential abuses that involve so-called timing transactions executed by money market funds. As written, the measure could have allowed the Internal Revenue Service to tax some of the income generated by tax-exempt TOB programs, a business that supplies synthetic notes to money market funds and is estimated to total about $75 billion annually.

The partial repeal of the 10-year rule would ease a restriction enacted in 1988 that forces housing agencies to use mortgage prepayments that come in more than 10 years after mortgage revenue bonds are issued to retire the debt, a requirement that effectively prevents the payments from being recycled into new mortgages.

The provision would permanently repeal the 10-year rule for bonds issued after the date of enactment and provide a one-year exemption from the rule for outstanding bonds. However, the rule would still apply to currently existing bonds after the one-year exemption expires.

Another provision could spur the use of industrial development bonds. Currently, IDBs issued on behalf of manufacturers and certain farmers are restricted to the $10 million aggregate bond and capital expenditure limit set by Congress in 1978 and can only be used to finance manufacturing facilities. The proposal would expand the definition of eligible facilities to include assembly, high-tech software, and biomass, which would cost $51 million, according to the Joint Tax Committee.

An earlier provision retained in the proposed bill would raise the aggregate capital expenditure limit on projects financed with qualified small-issue bonds to $20 million but would keep the bond issuance limit at its present level of $10 million. That provision would cost the Treasury $317 million, according to an earlier JTC report.

Another provision would extend the $8 billion Liberty bond program, currently set to expire Dec. 31, 2004, for five years, while a separate provision would extend the period in which one additional advance refunding is permitted for one year through Dec. 31, 2005.

Another measure would extend and broaden the QZAB program, which allows the issuance of $400 million a year in taxable tax-credit bonds to renovate schools in poor neighborhoods. The program was created in 1997 but lapsed at the end of 2003. The proposed legislation would allow the program to be used for new construction and land acquisition and would retroactively extend it for two years through Dec. 31, 2005.

Another measure would grant Indian tribes more flexibility, through Dec. 31, 2005, to issue tax-exempt bonds.

One measure, added last week, would create a "green bond" demonstration project that would allow up to $2 billion in tax-exempt bonds to be issued before Sept. 30, 2009, for environment-friendly entertainment and resort facilities, primarily for four projects in Syracuse, N.Y., Atlanta, Lakewood, Colo., and Shreveport, La.

The bill also would create a pilot program for a new category of tax-exempt bonds that not-for-profit organizations could use to finance the purchase of forest land. Under the program, conservation groups could benefit from the issuance of up to $1.5 billion in tax-exempt bonds before Dec. 31, 2006. The organizations could pay off the debt with revenues generated by logging, without violating the tax code's private-activity bond restrictions.

A railroad revitalization plan would provide states with $500 million in federal tax credits over three years to provide backing for intercity rail capital projects and another $500 million in credits directly to short-line and regional railroads to fund qualified railroad rehabilitation projects.

The measure would also make $200 million in tax credits available for New York City to use on rail infrastructure projects in the New York Liberty zone. All three provisions would be effective from Jan. 1, 2005, through Dec. 31, 2007.

The bill also includes tax incentives for investment in the District of Columbia that would extend economic development bonds and first-time homebuyer tax credits for another year through Dec. 31, 2004.

One provision would retroactively extend through Dec. 31, 2005, the district's enterprise zone program, which lapsed at the end of 2003.

Reauthorizing the program would once again give the district the power to issue up to $15 million in enterprise zone bonds per borrower, with no overall limit on how much debt could be issued.

The amendment would also extend to Jan. 1, 2006, a capital gains exemption that expired on Jan. 1 of this year. The exemption would apply to investors who invest cash in a qualified enterprise zone business and who hold that investment for a five-year period.

The amendment also includes language that would retroactively extend the district's first-home homebuyer federal tax credit to Jan. 1, 2006, from Jan. 1 of this year. More than 22,000 taxpayer claims worth $76.5 million were filed under the homebuyer tax credit program from its inception in 1998 through the first half of fiscal 2003.

In order to help Indian tribes finance school construction, the proposal would create a new class of taxable tax-credit bonds similar to those used in the four-year old QZAB program.

The so-called qualified tribal modernization bond program would allow the issuance of $200 million annually for 2005 and 2006. In order to qualify, 95% of the net proceeds must be used for the construction, rehabilitation, or repair of a tribal school facility funded by the Bureau of Indian Affairs.

Holders of the bonds would receive tax credits instead of interest on the bonds. Unlike QZABs, the program would have more stringent requirements, such as requiring that the bonds be held in a trust and be used for capital projects.

The bill also added the municipal bond provisions from a slimmed-down energy tax package that was introduced by Sen. Pete Domenici, R-N.M., in February.

Those energy bill measures would protect the ability of municipal utilities and state agencies to use tax-exempt bonds to prepay long-term contracts for natural gas by easing existing regulations to make clear that a utility may base the volume of a gas prepayment contract on gas usage over the previous five years. They would make renewable-energy production tax credits available to public power utilities and allow them to sell the credits to a private entity for cash.

The provisions would also create an ethanol tax credit to ultimately generate $2 billion in highway construction funding and provide loan guarantees to help finance a natural gas pipeline from Alaska through Canada.