WASHINGTON - The Bush administration's $3.1 trillion budget request for fiscal 2009 contains only a few bond-related tax proposals, including one to allow mortgage revenue bonds to be used to refinance subprime loans and another to eliminate the private-activity bond volume cap for water and sewer bonds for issuers that implement "full cost pricing."

The request for the new fiscal year, which starts Oct. 1 and is likely to have limited impact with voters set to elect a new president in November, also proposes temporary relief for individuals from the effects of the alternative minimum tax, a restructuring of the tax benefits given to New York City in the wake of the Sept. 11, 2001 terrorist attacks, and an expansion of tax-free savings plans.

Noticeably absent from the fiscal 2009 request are two proposals the administration has routinely pushed for in past budgets. One is the repeal of the $150 million limit on outstanding non-hospital qualified 501(c)(3) bonds and an elimination of restrictions on these bonds' use for residential housing property. The other is an extension of the $400 million-a-year qualified zone academy bond program, under which issuers issue taxable tax credit bonds to finance renovations and repairs to existing school facilities.

The failure to propose the extension on the QZAB program probably reflects the fact that Treasury officials have been unhappy about the many tax-credit bond programs that have been established, one source said.

The administration included other tax proposals in the budget request that would increase information reporting requirements for securities brokers and for state and local governments.

The administration's mortgage revenue bond proposal comes as the Senate Finance Committee has included a smaller but broader MRB proposal in economic stimulus legislation now pending before the full Senate.

Eric Solomon, the Treasury Department's assistant secretary for tax policy, told reporters at a budget briefing yesterday that the administration did not push for its MRB proposal to be included in the stimulus package because it might have slowed down congressional approval of the package.

The administration has proposed that the private activity bond volume cap be increased by $15 billion for three years through 2010 and for the excess cap to be used only for refinancing subprime loans that could default unless lower cost financing is put in place. Currently the tax code only permits tax-exempt MRBs to be used to finance new loans for first-time buyers of single family housing.

The MRB proposal pending in the Senate, which was sponsored by Sens. John Kerry, D-Mass., and Gordon Smith, R-Ore., would expand the PAB volume cap by $10 billion over three years, with the full amount available in the first year, and would allow the extra capacity to be used either for refinancings of subprime loans or first-time loans to homebuyers. The Senate was expected to vote last night on a measure that would limit debate on the stimulus package and is to vote on the package itself tomorrow.

The administration is proposing to eliminate the PAB volume cap for water and sewer bonds at the same time it is proposing only $555 million for the clean water state revolving loan fund, far less than the $700 million that Congress gave the SRF for fiscal 2008 and even below the $688 million the president proposed for the current year.

Rick Farrell, executive director of the Council of Infrastructure Financing Authorities, said yesterday that the proposed elimination of the volume cap for water and sewer bonds, which the administration also requested last year, draws mixed reaction from states.

"For some states it will be helpful. It depends on the state situation," he said. "Texas is interested in it. They think they could take advantage of it." But other states have not been bumping up against their caps with regard to water and sewer bonds, he said.

Another problem is the requirement that issuers adopt full-cost pricing, which means that their water and sewer rates would have to be increased to reflect the cost of service as well as any needed replacement facilities. "In an abstract world, that sounds great but how much can you raise water rates? Is that politically doable?" Farrell asked.

CIFA is unhappy with the proposed decrease in funding for the clean water SRF program. "We've got a tough road ahead of us. Even though there is a lot of support for this program, discretionary funding is just getting hammered," he said, adding that when budget increases are restricted, "We have trouble getting to the top of the list."

The administration proposed $842 million for the drinking water SRF, the amount Congress provided for the program in fiscal 2008.

Bush is proposing to extend AMT relief to individuals through 2008 and to increase the exemption levels for taxpayers. The AMT, which applies to interest earned on PABs and some governmental and 501(c)(3) bonds, is designed to target high income households, which are eligible for so many tax breaks they pay little or no taxes. However the AMT is not indexed to inflation so more taxpayers become subject to it each year. Congress approved AMT relief for the 2007 tax year. Treasury's Solomon said yesterday that if AMT relief is not enacted for 2008, an additional 22 million taxpayers will become subject to the tax.

The administration is proposing to sunset some of the existing New York Liberty Zone tax benefits that were provided in 2002 to help the city recover from the terrorist attacks but that the administration claims are not longer usable in the form they were provided. The administration wants to replace the benefits with tax credits for the state and city for expenditures incurred in building or improving transportation infrastructure into or connecting with the New York Liberty Zone.

The Bush administration would also replace the current law investment retirement accounts with two new ones, a Lifetime Savings Account and a Retirement Savings Account. Muni market participants typically monitor such programs because they can lure investors away from tax-exempt bonds.

Proposals likely to make state and local groups and securities firms unhappy would require increased reporting information for certain government payments for property and services and would require "basis reporting" on security sales. q

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