WASHINGTON - Sen. Jeff Bingaman, a member of the Senate Finance Committee,plans to introduce legislation next month that would boost demand for municipal debt by easing restrictions on the ability of banks and corporations to purchase bonds, similar to a measure pending before the House Ways & Means Committee.
Bingaman, a New Mexico Democrat, wants to increase to $30 million from $10 million the tax code's so-called bank deductibility limit, which currently allows banks to deduct 80% of the costs of purchasing and carrying tax-exempt bonds issued by state and localities whose annual bond issuance does not exceed $10 million.
The measure would mirror a provision in a bill introduced last month by House Financial Services Committee Chairman Barney Frank, D-Mass.,on behalf of Richard Neal, D-Mass., chairman of the House Ways and Means Committee's select revenue measures subcommittee.
"I am concerned about the credit crisis' impact on the ability of municipalities in New Mexico and across the country to raise capital, and I think this legislation could help solve that problem," Bingaman said yesterday.
Though there may not be enough time for the Senate to act on the measure when it returns from its August recess, the move suggests growing interest among lawmakers in loosening restrictions in the 1986 Tax Reform Act - such as the bank deductibility limitation - that decreased the amount of tax-exempt income banks and corporations could report and had adverse consequences for governments and nonprofit issuers.
Frank and Neal introduced the provision, along with another one that would expand the 2% de minimis rule to allow more corporations to own muni bonds, in a bill in June. At the same time, Frank introduced the Municipal Bond Fairness Act, which seeks to require credit rating agencies to rate municipal bonds on the same scale as other securities and based on the likelihood of repayment. The credit rating bill also would require the Treasury Department to collect information on the municipal bond insurance industry and to annually report to Congress on the matter.
Though the Financial Services Committee passed the credit rating bill by voice vote last week, the Neal bill remains before Ways & Means and has not yet been acted on. William Tranghese, a spokesman for Neal, did not return phone calls.
Issuer groups monitoring the legislation - including the National Association of Health and Educational Facilities Finance Authorities and the Government Finance Officers Association - said they are eager for Bingaman to introduce his version of the bill because they believe it will provide crucial help to small issuers across the country.
"We've had a number of hospitals across New Mexico that have been unable to do tax-exempt financing because of the lack of bank deductibility, and we really appreciate Sen. Bingaman's interest," said NAHEFFA counsel Charles Samuels of Mintz Levin Cohn Ferris Glovsky & Popeo PC here.
Susan Gaffney, director of the GFOA's federal liaison center here, noted that had Congress pegged the $10 million deductibility cap to inflation - similar to the proposal made by Frank and Neal -it would now total $19.5 million.
"That alone speaks volumes to how much an increase is needed," she said. Seen another way, $10,000,000 in 1986 dollars is worth $5,286,000 today, and few projects can be done at that amount, she said.
In addition to raising the cap, the Frank and Neal bill would allow more borrowers that sell bonds through conduit issuers to qualify as small issuers by electing to apply the $30 million issuance limit to themselves rather than the conduit issuer.
Another measure in that bill - which Bingaman would like to include in his version of the proposal - would increase private sector incentives for purchasing tax-exempt bonds by expanding the 2% de minimis rule to enable more corporate investors to benefit from owning them. The rule's name derives from allowing corporations to deduct the cost of interest on their tax-exempt debt, without having to prove that they did not borrow to buy the bonds, as long as tax-exempt bonds are 2% or less of total assets.
Under the Frank and Neal bill, the de minimis rule would be expanded to apply to financial institutions like banks and securities firms, a move intended to eliminate certain disincentives for such firms to purchase tax-exempt bonds.