WASHINGTON - For anyone in the municipal market, legislative developments over the last few weeks must have seemed like a scene from Macbeth. If you closed your eyes you could almost hear the immortal lines:
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Life's but a walking shadow, a poor player That struts and frets his hour upon the stage, And then is heard no more; it is a tale Told by an idiot, full of sound and fury, Signifying nothing. - Macbeth
What, you ask, conjures up this quote when it comes to munis? It is triggered by two recent developments. The most important centers around the legislative life of the favorable tax- exempt bond provisions in the huge Congressional tax bill that now appear to be dead for the year as a result of the standoff between the Republican-controlled Congress and President Clinton. The other is a scattergun and scatterbrained bill that was introduced in the House over the summer that is a perfect example of how not to try to legislate. The half-dozen favorable bond provisions that were included in the vetoed tax bill are significant because they are the culmination of 13 years of steady improvement in the treatment of municipal bonds by Congress since the toughest- ever curbs were imposed on tax-exempts as part of the massive Tax Reform Act of 1986.
Each year more and more items have been included in tax measures that aided and expanded the issuance of bonds, while there have been fewer and fewer attempts none in the last three years to place new restrictions on tax-exempt bonds. But the veto of the overall tax bill and the staunch refusal of the GOP majority in Congress to negotiate a compromise tax and budget plan means that there is now virtually no possibility that there will be a significant tax bill this year. There may not even be an agreement reached to pass a small tax bill to extend tax code provisions that are expiring. Some of those so-called extenders may end up in an end-of-session spending bill that Congress may pass to keep the government operating through next September, but none of the tax-exempt bond measures that were in the big tax bill is likely to be included. The only bond measure that eventually might be included in the stopgap-spending bill is a one-year extension of the Qualified Zone Academy Bond pilot program that was surreptitiously added to the 1997 tax bill by Rep. Charles Rangel, D- N.Y., and which expires at the end of this year. But any extension of QZABs depends heavily upon how much the Republicans need Rangel's vote and influence to get the final spending and budget package enacted. Although the bond provisions that were in the tax bill are virtually dead for this year, the "absurd agony" behind the process may not have been as much wasted time and energy as one might think. Once a proposal has been put on the legislative table and incorporated into a bill, especially one that has been passed by both houses, it is likely to be resurrected and eventually become law. Since next year is an election year, any tax bill may suffer the same politicization that torpedoed this year's measure. But there will be a new Congress and a new president in 2001. In the long run, this year's "sound and fury" may not be have been meaningless. With patience and perseverance, the favorable bond provisions in the vetoed tax bill are likely to become a reality. At the same time, there was a development in the last few weeks "signifying nothing," but one which could have been potentially dangerous to the municipal market. Legislation introduced in August by Rep. Ralph Hall, D-Tex., could have blocked a variety of tax-exempt financings if those financings funded projects permitted by current tax law that competed with nearby privately funded projects. The bill was aimed at preventing the use of tax-exempts to finance projects within five miles of competing privately financed facilities. It was believed to be specifically aimed a preventing the Las Vegas Convention and Visitors Authority from issuing $150 million in tax-exempt bonds to expand the Las Vegas Convention Center which would compete against a private convention center run by a Las Vegas hotel. The measure, which state and local groups rightfully attacked because of its threat to "myriad public services," was a reckless approach because it potentially could block the use of tax-exempts for any project that might happen to compete with a private project. That could include hundreds of thousands of potential projects, ranging from a proposal to build a municipally owned power plant that happened to be within five miles of an investor-owned utility's plant to a municipal skating rink that was to be built just down the street from a privately owned rink that is open to the public. The potential effect of Hall's bill on the tax-exempt status the bonds of municipal electric systems is particularly ironic because he is the ranking Democrat on the House Commerce Committee's energy and power subcommittee which has proposals before it to try to evenhandedly restructure the nation's electric utilities. Worse yet, Hall's bill contained a retroactive effective date that specified that the measure would apply to any bonds sold on or after Aug. 2 the date it was introduced.
That, of course, placed a potential cloud over any bond deal that went to market for a project where there was a competing private facility down the street and required bond counsel to disclose to investors that Hall's bill could result in the bonds becoming taxable if the bill became law.
Fortunately, Hall abandoned his bill under pressure from state and local groups. But the bill never should have been introduced in the first place. It was far too broad and Hall had no idea when he introduced it how many bond- financed projects it potentially might cover. And it never have had a retroactive effective date. That device should only be used to halt abusive deals that are being rushed to market to beat new curbs such as the escrow deals and the pooled financings of the 1980s, not to decide policy questions. Hall's bill is a good example of the danger of throwing a legislative cluster bomb at a perceived problem and then discovering that it could have killed and maimed far more then he intended. It was a mistake that should not be repeated.
