An article in yesterday's Business section incorrectly said mutual funds that invest in tax-exempt securities violated the law because they failed to publish prices for buying back shares on Wednesday. The Securities and Exchange Commission said it has not ruled on the legality of the funds' failure to publish prices, but has decided not to take any action against the firms.
The Senate Finance Committee will meet Monday to vote on dropping a proposal to include interest from tax-exempt bonds in a new minimum tax, committee Chairman Bob Packwood (R-Ore.) announced yesterday.
Although 10 of the panel's 20 members signed a letter yesterday asking Packwood to convene a meeting immediately to resolve confusion on the bond provision, Packwood decided instead to make the matter the first order of business when the committee begins considering his tax-revision proposal next week.
Packwood scheduled a press conference for today to discuss the minimum tax and his view that it should be designed to ensure that all wealthy taxpayers pay their fair share of taxes, aides said. It seemed to be an indication he wants the provision to remain in his proposal.
The municipal bond market, which virtually shut down in panic on Wednesday after Packwood's proposal was released, recovered somewhat yesterday, but trading was far lighter than normal, according to John Gilchrist, senior vice president and head of public finance at the First National Bank of Chicago.
He said that the investors will continue to be reluctant to trade tax-exempt securities, even if the Senate Finance Committee should vote to change the proposal immediately.
"It is important for Congress to go on record that any changes in the tax law will be on a prospective, not retroactive, basis," Gilchrist said.
Sens. Lloyd Bentsen (D-Tex.) and Daniel Patrick Moynihan (D-N.Y.), members of the Finance panel, said they believe the proposal will be rejected.
"My main concern is that we have an inescapable minimum tax to make sure that everyone pays a fair share of tax," Packwood said in a statement announcing that the minimum-tax provision would be the first item on the agenda. "The integrity of the tax system is completely undermined when high-income taxpayers pay less than the middle class."
He added that no other elements of the proposed minimum tax -- which would apply to many more taxpayers than the current minimum tax -- would be considered on Monday. The proposal also includes other restrictions on municipal bonds, which the panel is not expected to take up until next month.
Not only did trading increase somewhat in the tax-exempt market, so did prices. Tax-exempt bonds fell sharply in price on Wednesday -- by between $2.50 and $3.50 for each $100 in face value per bond -- although dealers said there was so little volume that any quoted price was suspect.
Yesterday, municipal bonds regained about $1 per $100 in face value. Dealers said that the interest rates on the municipal securities that traded yesterday were somewhere between the rates on fully taxable bonds and the rates that prevailed on tax-exempt bonds before the Packwood proposal.
Because of the turmoil in the municipal bond markets, many local governments have postponed sales of securities.
On Wednesday, New York City canceled a $450 million bond sale, and Illinois has not yet decided whether to try to sell $200 million of bonds next Tuesday.
The Illinois sale was designed to refund outstanding bonds that were issued when interest rates were much higher. If interest rates remain high -- even if trading volume returns to normal -- Illinois might find that the savings it would reap from the new bond issue are so small that it would not be worth selling the issue.
Bentsen, who signed the letter asking for immediate action by the Finance Committee, said the city of San Antonio had to postpone a planned bond issue because of the collapse in the market when the details of Packwood's plan became known on Wednesday.
"That idea just can't float," Bentsen said of the tax provision. "You just can't do that, and I will oppose it. We will hear from every city councilman and every county judge" worried about whether their jurisdictions will be able to issue bonds.
Earlier versions of the Packwood proposal called for tax-exempt interest in the minimum tax only for "newly acquired" bonds, presumed to be those purchased after the general effective date of Jan. 1, 1987. But when details of the plan were made public on Wednesday, it included all tax-exempt interest, which would be taxed at a rate of 20 percent.
The tax-revision legislation passed by the House late last year would have included in the minimum tax only tax-exempt interest on newly issued "nonessential function" bonds, which do not include such traditionally tax-exempt bonds as state and local general obligations.
Packwood's minimum tax, like the current version and the one in the House bill, is intended to restrict the use of deductions and credits used by upper-income taxpayers to reduce their tax liability. The current tax code exempts from the minimum tax the first $40,000 of income for a couple and $30,000 for a single person, so that middle-income taxpayers normally are not covered by the tax.
The exemption amounts in both congressional plans are the same as under current law, but the House bill and the Packwood plan restrict many more deductions, so that more taxpayers would have to pay under both proposed alternative minimum systems.
In a related development, the Securities and Exchange Commission said that some mutual funds that invest in tax-exempt securities violated the law on Wednesday because they did not publish a price at which investors could redeem their shares.
However, the regulatory agency said it would not prosecute funds that failed to do so on Wednesday or yesterday because of the "emergency" conditions in the municipal bond market.