WASHINGTON — Supporters of Build America Bonds lobbied hard Wednesday to convince lawmakers and administration officials to extend the program for another year as it appeared possible that any compromise tax legislation might not contain any municipal bond-related provisions.

"I'm not feeling great about the bond provisions," one lobbyist said during the morning. "I would hate to end up with a deal that benefits high-income taxpayers that says, similar to the New York Post headline when President Ford refused to bailout New York City in the 1970s, 'State and Local Governments: Drop Dead.' "

But prospects brightened later in the day when Senate Majority Leader Harry Reid, D-Nev., told reporters that Senate Democrats would try to obtain changes in an agreement administration officials reached with Republicans and bring the measure to the floor later this week. Market participants were hoping that the changes might include an extension of BABs and other muni bond provisions.

Reid made the remarks after some Democrats balked at the agreement. Nine Senate Democrats, led by Ron Wyden from Oregon, also sent a letter to Reid and Minority Leader Mitch McConnell, R-Ky., urging them to make sure the BAB extension is included in the tax bill.

"Build America Bonds have proven to be an efficient way to create jobs and build lasting infrastructure across the country," they said. "With more than $150 billion of these bonds issued in just a year and a half since the program was created, [BABs] now constitute 21% of the municipal bond market."

Muni market participants lobbied lawmakers and urged members to contact them to push for extensions of BABs and a proposal to extend the greater small-issuer limit for bank-qualified bonds.

The lobbying efforts came as White House economic adviser Larry Summers told reporters that President Obama would like to see the BAB program extended. On Tuesday, John Cross 3d, the Treasury's associate tax legislative counsel, warned at the Securities and Exchange Commission's hearing on municipal securities that the loss of BABs could significantly impact supply pressure in the market.

"In the same way that BABs benefited the municipal market by relieving supply pressures, if you get rid of them it will have the converse effect of increasing supply pressures in the municipal market," he said.

Cross noted the auction-rate securities market is "gone forever" and the market for variable-rate demand obligations is harder to tap because of rising liquidity costs. "At Treasury, the domestic finance folks have worried a lot that those synthetic alternatives will be less available and they view BABs as providing a more sustainable option for longer-term financing," he said.

But most Republicans oppose any extension of stimulus programs and many of the Democrats who traditionally supported the bond provisions have warned they will vote against any measure that extends tax cuts for the wealthy and allows them to avoid estate taxes — proposals already agreed to by key Republicans and the administration.

The Senate's lead GOP negotiator, Jon Kyl of Arizona, and other Republicans oppose BABs, claiming they reward states and localities with lower credit ratings that sell the bonds with higher interest rates and garner higher subsidy payments from the Treasury. They also complain the bonds reap higher than warranted underwriting fees for banks.

Treasury officials strongly support BABs, saying they have broadened the investor base for municipal bonds and lowered issuers' borrowing costs. Ultimately, the BAB issue will be decided by Kyl and Treasury Secretary Timothy Geithner, sources said.

Market participants, particularly issuers, are hopeful lawmakers might be persuaded to support a provision that would allow banks to deduct 80% of the cost of buying and carrying tax-exempt debt sold by issuers who issue no more than $30 million of such debt per year, up from $10 million.

They argue while the rise in the small-issuer exemption for bank-qualified bonds was included in the stimulus law, bank-qualified bonds have been around for years. They say a bill introduced in May by Sen. Jeff Bingaman, D-N.M., to increase the small-issuer exemption was co-sponsored by Sens. Chuck Grassley, R-Iowa, ranking minority member on the Senate Finance Committee, and Mike Crapo, R-Idaho. But other Republicans see the provision as stimulus-related and oppose it.

In other business House members late Wednesday approved on a vote of 212-206 a continuing resolution that funds federal agencies at fiscal year 2010 levels through Sept. 30, 2011the end of fiscal year 2011, providing $45.9 billion less than Obama requested for the year and potentially jeopardizing funds needed to implement some of the reforms for the financial markets enacted by Congress this year.

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