Congress finds it tough to limit tax-exempt bonds

Closing a tax loophole can be like trying to get toothpaste back into the tube, as the Reagan administration and some of the more deficit-minded members of Congress have been finding lately. They have been trying this summer to limit the issue of tax-exempt bonds.

It's a complex question. The concern is with two particular kinds of bonds issued by states and local government jurisdictions: industrial development bonds, or IDBs, and mortgage revenue bonds, or MRBs. The former are typically used to finance new factories and other job-creating projects; the latter are used to generate a pool of below-market-rate mortgage money within a community.

But moves to extend MRBs have gained considerable momentum in Congress, making the purse-string tighteners all the more eager to limit IDBs somehow.

The Senate has passed a bill, S 137, that would extend indefinitely the MRB program for single-family houses, which would otherwise expire at year's end. The bill has been attached as an amendment to the Senate's bill to repeal tax withholding on interest and dividends. A conference committee is expected to take up soon, perhaps this week, the reconciliation of this Senate bill with its House counterpart, which has no such extraneous amendments.

A House observer says he doubts that House leadership will let the Senate use the amendment route to repeal the sunset on mortgage bonds. He says he finds it more likely that the MRB bills, S 137 and its House counterpart, HR 1176, will be combined in committee with the bills to restrict IDBs, HR 1635 and S 1061 - politically difficult though that may be.

The bills to extend mortgage subsidy bonds have a majority of each house signed on as cosponsors, but committee aides suggest that the support may be rather shallow.

Both MRBs and IDBs have ''bred like cats,'' as one Capitol Hill aide puts it. They have proliferated more rapidly than traditional public-purpose bonds, such as those for schools and sewers. The Joint Committee on Taxation estimates that these ''private-purpose bonds'' - IDBs, MRBs, and their kin - will cost the federal Treasury $64 billion over the next five fiscal years. This figure has not gone unnoticed at a time of $200 billion federal budget deficits.

But many localities see these bonds as the cornerstone of their economic development strategy. As local officials see it, IDBs woo into town new factories which mop up unemployment, enhance the local tax base, and allow the officials approving them to bask in reflected glory as promoters of prosperity. Those local officials are less concerned about the tax expenditure these bonds represent to the federal Treasury.

''The county officials aren't the ones people call to complain to about the $ 200 billion federal deficit,'' says Reg Todd, an aide to Rep. J.J. Pickle (D) of Texas, who is sponsoring HR 1635, which would restrict these bonds. Mr. Todd cites a recent case in Norfolk, Va., which he says typifies the abuse of IDBs. The Norfolk Port and Industrial Authority granted preliminary approval for industrial development bonds to finance a $2.5 million jet for a local psychiatrist-entrepreneur who told officials that a private aircraft was ''indispensable'' in acquisitions of hospitals and clinics.

The same week that the port authority heard the case of the psychiatrist, the assistant Treasury secretary for tax policy, John E. Chapoton, was testifying before the House Ways and Means Committee in favor of Representative Pickle's bill, HR 1635, which would:

* Prohibit construction financed with IDBs from getting the further tax break of accelerated depreciation.

* Deny tax-exempt status to IDBs backed by federal deposit insurance.

* Restrict small-issue IDBs to small businesses.

* Prohibit use of IDBs to finance purchase of land.

The Joint Committee on Taxation estimates that HR 1635 will save the Treasury at least $3.6 billion over the next five fiscal years, a figure that makes a nice counterbalance to the $2.8 billion that the extension of the MRB program is expected to cost during that period.

''It has all the makings of a beautiful relationship,'' congressional aide Todd says.

HR 1635 would cap IDBs by reducing their tax advantages and letting market forces take over. Another approach that might be politically easier for Congress would be to set a per capita limit of how many dollars' worth of IDBs the states could issue. This would put a burden on the governors, who would then have to find some way to set priorities for IDBs within their own states.

It's not just the tax cost of private-purpose bonds that concerns their opponents. They argue that these bonds are crowding traditional tax-exempts - for sewers, schools, and so on - out of the marketplace, and are also driving up interest rates. The spread between the rates of taxable and nontaxable bonds is narrowing, Congressional Budget Office director Alice Rivlin told the Ways and Means Committee last month, from about 30 percent to 20 percent.

Moreover, William Gainer, planning director for housing and community development at the General Accounting Office, says mortgage subsidy bonds are ''far more costly'' than their benefits would justify.

In 1982, the GAO found, most home buyers under the single-family program could have bought their houses without help. It also found that 75 percent of the benefit of the lower interest rates went to purchasers of the bonds and to financial intermediaries, and only 25 percent to the home buyers. As interest rates come down, this ratio is expected to change, but not by much. ''It looks like an inefficient delivery mechanism that tended to assist those who didn't need help,'' Mr. Gainer adds.

Voting against home ownership is like voting against the flag or apple pie, as the numbers of sponsors on the MRB bills suggest. ''But where do we get the money for this?'' Mr. Todd asks. ''Everyone wants to help housing, but when we get down to the lick-log, we just haven't had a suggestion'' for offsetting the cost of the program.

Sen. Robert J. Dole (R) of Kansas last week introduced legislation that would give tax credits to first-time home buyers, thereby reducing the need for mortgage bonds. This is the sort of measure the Treasury's Mr. Chapoton and others in the administration have been urging.

The National Association of Home Builders is, unsurprisingly, backing the MRB program. Jim Schuyler, staff vice-president and legal counsel, calls it ''well targeted'' and an effective means of making home ownership possible at the ''low end'' of the income spectrum by providing mortgage money 2 to 4 percentage points under market rate.

Miles Friedman, executive director of the National Association of State Development Agencies, says he remains open to the prospect of modifying the law governing IDBs. ''But our frustration is that the debate over IDBs has focused on the revenue loss, rather than the effectiveness of the bonds as a development incentive.'' The real question, he suggests, is, ''Are we stimulating business in a cost-effective way?''

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