WASHINGTON - The presidential election has spared the municipal bond market from further curbs - at least for this year.
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But the reprieve means the tax-exempt market will be on the chopping block next year when the stakes will be a lot higher.
The muni market was at risk throughout the summer after House and Senate Republican leaders said they planned to try to push a tax cut through Congress after the August recess. Doing so could have led to attempts to pay for the cut by putting new curbs on tax-exempt bonds, such as the Clinton administration's proposal to repeal the 2% de minimis rule.
Those plans evaporated last week when Republican leaders gave up on trying to pass a tax cut before the Nov. 5 elections. Instead, they will try over the next three weeks to enact the remaining spending bills needed to keep the government operating in fiscal 1997, which begins Oct. 1, and then adjourn for the year to go home and campaign.
That leaves the decision on future tax cuts up to the voters, who have a choice between conflicting tax plans proposed by President Clinton and GOP presidential nominee Bob Dole.
The decision not to engage in a tax cut battle means that the muni market got off relatively easy this year at the hands of lawmakers.
Despite the threat of tax reform, the de minimis proposal, and Sen. Daniel P. Moynihan's bill to prohibit the use of governmental bonds to finance sports stadiums - all of which sent collective chills through the market - there actually were a few small legislative victories.
One small tax measure that was enacted included a long-needed provision that protects the tax exemption of 501(c)(3) bonds when issuers run afoul of Internal Revenue Service rules. And the small-business tax bill that Clinton signed about three weeks ago included a series of changes to the tax code that generally aid municipal bonds.
The latter piece of legislation, while centered around an increase in the minimum wage, also gave states more latitude to use private-activity bonds to finance low-interest loans for first-time farmers, and allows municipal utilities to use tax-exempt bonds to buy a hydroelectric plant from the Alaska Power Administration.
It also included a measure that prohibits new "local furnishers" - electric and gas utilities whose service areas lie entirely within two counties, or a county and a contiguous city - from issuing tax-exempt bonds, while allowing existing local furnishers that wish to expand beyond their current two-county service area to take up to six months to defease their outstanding tax-exempt bonds, rather than being forced to defease them immediately.
Tax committee staffers attempted to insert a killer provision that would raise revenues by preventing existing local furnishers from expanding within their current region without redeeming their bonds. But the Senate rejected the proposal and included language in the final measure that reaffirmed local furnishers' existing ability to expand.
The local furnishers measure is an excellent example of what the muni market faces in next year's tax battle no matter who wins the election - Dole with his ambitious 15% tax cut plan, or Clinton with his more targeted proposal.
Both Dole's $551 billion formula and Clinton's $152 billion approach will have to find offsetting revenues either to pay or defray the cost of the tax cuts. And that's where the muni market, as usual, will be vulnerable.
Clinton's latest economic plan does not mention his proposal to repeal the de minimis rule, but you can be sure that the measure - which sparked major disruptions in the short-term market last spring - will take on new life if he is reelected.
Although there is not known to be any suggestion of curbing munis in Dole's plan, both a Dole administration and Congress would be very likely to look at possible new limits on tax-exempt bonds to help raise revenue needed either for such an ambitious tax cut or for a major revision of the tax code. That is exactly what Congress did when it exacted the Tax Reform Act of 1986, and that is what it is likely to do again next year.
In the meantime, the muni market can relax until after the election. But no matter whom voters elect, market participants will have to get out their Gucci lobbying shoes on Nov. 6 and hit the deck running. If history is any guide, tax-exempt bonds will be very vulnerable next year.
