WASHINGTON - Sen. John Kerry, D-Mass., has introduced legislation that would exempt all private-activity bonds, from the alternative minimum tax, hoping it will be included in the tax portion of the stimulus package that the Senate Finance Committee could consider as early as Monday, sources said.

Congressional aides said yesterday it is not yet clear whether Kerry's measure, which mirrors a bill pending in the House, will be included in the tax package. The AMT, which applies to interest earned on private-activity bonds and some governmental and 501(c)(3) bonds, was created to prevent high-income households eligible for tax breaks from paying little or no taxes.

Meanwhile, Sen. Diane Feinstein, D-Calif., introduced a bill Tuesday that would require the Treasury Secretary to allocate $10 billion from the Troubled Assets Recovery Program to local governments that have lost money from investments they made in collapsed financial institutions, such as Lehman Brothers Holdings Inc. Several muni markets are pushing for it to be included in the stimulus bill.

The $10 billion would be limited to local governments that made "highly rated investments" whose eligibility for the program would be determined by the Treasury Secretary, according to the bill.

Other tax provisions being floated for the stimulus package include: increasing to $30 million from $10 million the tax code's so-called bank deductibility limit to allow banks to buy more muni bonds; allowing banks to invest up to 2% of their assets in municipal debt without disallowing a proportional amount of their interest expense deduction; providing states with a $25 billion cash infusion to help them shore up budgetary gaps; and allowing state and local governments to deduct their sales taxes, sources said.

Under the current provision on bank deductibility banks are allowed to deduct 80% of the costs of purchasing and carrying tax-exempt bonds issued by states and localities whose annual bond issuance does not exceed $10 million.

Another related provision under consideration for the stimulus would allow borrowers that sell bonds through conduit issuers to be qualified as small issuers by electing to apply the $30 million issuance limit to themselves.

Kerry's bill to exempt PABs from the AMT, which would apply to any bonds issued after its enactment, is similar to a House measure introduced last month by Ways and Means Committee member Rep. Richard Neal, D-Mass. That bill, which was referred to his committee, would have to be reintroduced for the new session of Congress that began this week.

A coalition of state and local government groups, including the Government Finance Officers Association and the National Association of Counties, yesterday sent Kerry a letter supporting the bill that was very similar to a letter the groups sent to Neal last month.

"As state and local governments continue to face the challenges brought on by the global credit crisis, legislative actions such as this will help attract more buyers to the market, resulting in interest savings for issuers, and ultimately, taxpayers," the letter to Neal stated. "On behalf of our tens of thousands of members, we strongly support this legislation."

Meanwhile, top House Democrats were nearly unanimous about the need for aid to state and local governments at a forum during which House committee chairmen met with economists to discuss what should be included in the economic stimulus package.

Mark Zandi, chief economist and cofounder of Moody's Economy.com, told the group that because "bond issuance has come to a complete standstill," aid to state and local governments is a "slam dunk."

However, several of the committee chairman said that aid should not be given to governments without certain conditions.

"There's no question we need to give as much aid to states as we can," said Rep. Charles Rangel, D-N.Y., the chairman of the House Ways and Means Committee, who suggested Congress establish mandated formulas for allocating stimulus funds, to ensure that political wrangling does not delay implementation.

Rep. Jim Oberstar, D-Minn., who chairs the House Transportation and Infrastructure Committee, called for a transparency system for all infrastructure projects financed with stimulus funds, including information about the jobs created by a project, the pay rate of those jobs, and monthly project status updates. He said governments should be given only a 90-day window to spend the money before losing it.

Keeping the public informed about projects funded by the stimulus bill could put pressure on governors that have been unwilling to take stimulus money, such as Republicans South Carolina Gov. Jim Sanford and Minnesota Gov. Tim Pawlenty.

"We'll find a way to make them use the money," Oberstar said. "Our job is to create jobs, not protect governors' reputations or advance their political agendas."

Under Feinstein's legislation, the Treasury Secretary would allocate the funds "to assist public instrumentalities, such as counties and cities, that have suffered significant increased costs or losses due to investments with failed financial institutions," according to a draft of the bill.

Feinstein said that 28 California cities and counties, as well as state pension funds, are in jeopardy of losing nearly $978 million as a result of investments with failed financial institutions, according to the League of California Cities.

A House companion bill is expected to be introduced by Rep. Jackie Speier, D-Calif., according to sources.

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