Lawmakers are expected to meet in a lame-duck session next week to draft a small fiscal stimulus bill that will narrowly focus on unemployment benefits and food stamps, but is not expected to include measures related to the municipal bond market, congressional sources said this week.

If the pared down stimulus bill passes Congress and is signed into law, it is expected to be followed early next year by a much larger stimulus measure. The larger measure could include aid to states for infrastructure projects as well as tax-related provisions that aim to loosen restrictions in the 1986 Tax Reform Act, which decreased the amount of tax-exempt income banks and corporations could report and also had unintended consequences on governments and nonprofit issuers.

Regan Lachapelle, a spokeswoman for Senate Majority Leader Harry Reid of Nevada, said yesterday that Reid "hopes we can take a first step together in the lame-duck [session] later this month and do more early on in the Obama administration." She added that Reid believes "all options should be on the table."

Asked about the larger stimulus package, congressional sources said there is strong support for including the contents of a bill introduced in both the House and the Senate earlier this year that would increase to $30 million from $10 million the tax code's so-called bank deductibility limit. That limit currently allows banks 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.

In addition to raising the cap, the 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 at the issuer level.

Sources said it could have a positive impact on thousands of issuers and noted that staff for New Mexico Democrat Jeff Bingaman, who co-sponsored the legislation in the Senate, have been actively recruiting support for the measure while Congress is in recess.

Sources said yesterday that it was unclear if infrastructure would be included in the initial, smaller stimulus bill. Still, House Speaker Nancy Pelosi of California said last week the legislation could resemble the $61 billion package that was approved by the House in September, but did not come up for a vote in the Senate.

That package heavily relied on providing infrastructure cash to states to stimulate the economy. It included $12.8 billion for highway infrastructure, $7.5 billion for water- and sewer-related state revolving funds, $600 million in bond-related airport funding, and $3.6 billion for transit, in addition to other provisions such as food stamps and extended unemployment benefits.

Meanwhile, the bipartisan Committee for a Responsible Federal Budget - co-chaired by White House and congressional budget veterans Leon Panetta and Bill Frenzel - issued a report Monday. It said the Democrats' short-term infrastructure-heavy proposal would cost $60 billion to $100 billion while a separate package proposed by Obama's presidential campaign would end up costing $190 billion. It did not quantify the cost of proposed tax cuts that could be included in a large stimulus bill.

"The stimulus should not include outlays or tax cuts that extend beyond the period in which they are expected to mitigate the effects of an economic downturn," the committee's report said.

Regardless of how the stimulus legislation is drafted, sources expect that hearings will likely be scheduled almost immediately next year to discuss what should be included in the more comprehensive package, and new types of tax credit bonds are likely to be included on the list, in addition to bank deductibility legislation.

House Ways and Means Committee chairman Charles Rangel, D-N.Y., as well as Senate tax-writing colleagues, have previously encouraged the use of tax-credit bonds as a way to provide targeted relief to certain areas of the economy.

Education is an area that Rangel could target for a new type of tax-credit bonds. At the Oct. 29 hearing his committee held on what should be included in any economic stimulus, Dennis Van Roekel, the president of National Education Association, testified about the growing need for investment in school infrastructure.

In April 2007, Rangel introduced a bill that would create a new type of tax-credit bond - qualified school construction bonds - that could be issued to finance the construction, rehabilitation, or repair of public schools, or acquire land for a new facility. That bill did not advance beyond the education subcommittee, but could re-emerge as talks about a comprehensive stimulus package begin.

State and local groups have been pushing Congress to pass a stimulus package with infrastructure aid and to include local governments in federal rescue facilities, specifically the Treasury Department's Troubled-Asset Relief Program and the Federal Reserve's Commercial Paper Funding Facility - two programs that have excluded tax-exempt bonds so far.

In a three-page letter sent on Nov. 5 to congressional leaders, Larry E. Naake, executive director of the National Association of Counties, cited an internal survey that found 71% of NACO's members worried about their ability to issue bonds in the current economic climate and about increasing costs for short- and long-term borrowing.

NACO called for federal funding to go directly to local transportation, housing, and water projects. The House-passed stimulus bill from September would have sent highway funds to the states for them to allocate to counties. But NACO advocated directly distributing those funds to county and other local governments.

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