The Joint Tax Committee has modified the way it categorizes tax-exempt bonds for purposes of calculating federal tax expenditures, causing some issuers to worry that the changes will make certain types of tax-exempt bonds less attractive to lawmakers.

The JTC made the modifications in a 93-page document released earlier this month that contains its newest estimates of federal tax expenditures for fiscal years 2008 through 2012.

The committee categorizes and shows the revenue losses or gains of existing or proposed tax law provisions to help lawmakers determine their relative merits.

Among the changes were the creation of two new categories for tax-exempt bonds - social spending and business synthetic spending.

The category of social spending, according to the committee, includes clean renewable energy bonds, qualified zone academy bonds, and qualified private-activity bonds for owner-occupied housing and student loans. These bonds are used to "primarily finance governmental functions or benefit not-for-profit users."

The category of business synthetic spending bonds includes qualified PABs for rental housing, green buildings, and highway and water projects, which "support borrowers that are in private, for-profit businesses."

However, some issuers of business synthetic spending bonds are concerned that this new classification could be misleading and undermine their attempts to obtain congressional support for these bonds.

"While we recognize the desire for JTC to establish some type of categorization system, the structure created is arbitrary and could create confusion within the industry and the federal government. It appears that JTC is attempting to draw a line between bonds that benefit 'the public' and bonds that benefit private businesses," said Toby Rittner, president and chief executive officer of the Council of Development Finance Agencies, which was initially created to support small industrial development bond issues but now has a broader mandate.

"With this type of arbitrary classification we could see the distinction between 'good' tax-exempt bonds - those that the JTC thinks benefit the public - and 'bad' tax-exempt bonds - those that the JTC thinks benefit private businesses," Rittner said, adding that the categories could be used by some lawmakers as "the basis for withdrawing tax subsidies from the 'bad' bonds."

"The fact of the matter is that it is too arbitrary to classify tax-exempt bonds in this manner and we would support a re-evaluation of this structure," he said.

Other market participants are concerned that as Congress is confronted with a ballooning federal deficit, it may use these categories to help rein in the budget.

"If you're looking at Congress trying to come up with ways to save money or use offsets for something else, you could see where somebody's priorities might come down," said a market participant who did not want to be identified.

The other types of bonds in the business synthetic spending category are: small issue qualified PABs and qualified PABs for sustainable design projects, airports, docks, mass-commuting facilities, rail-truck transfer facilities, energy production facilities, and sewage and hazardous waste facilities.

Brad Van Dam, the vice president of the American Association of Airport Executives, said that he is not surprised to see airports in this category because airports are not defined under current law as public projects.

"It makes perfect sense to see airports categorized this way," he said. "However, we would like to see current law changed so airports are classified as public purpose."

Edward D. Kleinbard, the JTC's chief of staff, said that the new categories do not change how the costs of the tax subsidies for tax-exempt bonds are calculated, and were created merely to provide more information to Congress about where federal money is going.

"The calculation of the numbers has not materially changed in that area," he said last week. "The idea is simply to give members a little more information, a little more context, about which tax expenditures are similar to others."

Other bonds categorized as social spending are: qualified energy conservation bonds; qualified PABs for student loans and veterans' housing, private nonprofit and qualified public educational facilities; private nonprofit hospitals; and public purpose state and local governmental bonds.

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