The Senate Finance Committee yesterday approved its compromise package on tax-exempt bonds after cutting taxes on those bonds by an additional $2.1 billion.
As approved, the bond package thus would bring in $5.6 billion less in tax revenue over five years than the current rules governing what kinds of bonds can pay interest that is exempt from taxation.
Proponents of the changes enacted by the Finance Committee as part of its tax-revision bill contended that, because the plan cracked down on some abuses of tax-exempt bonds, it qualified as reform even though more bonds could be issued in the future under the provisions of the bill.
The committee also enacted a series of changes in international taxation that would remove some tax advantages for U.S. firms doing business abroad and -- unlike the House-passed tax revision bill -- raise taxes on foreign companies with operations in the United States.
At the urging of the Treasury Department and Federal Reserve Chairman Paul A. Volcker, the panel softened as part of those changes a provision raising taxes on lending to less-developed nations.
The original proposal by committee Chairman Bob Packwood (R-Ore.) would have made it harder to use tax credits generated by loans to debtor countries against income from other loans. Treasury Department officials said the compromise amendment provided for a gradual transition that would not discourage the kind of lending and renegotiation of loans to the Third World that Treasury Secretary James A. Baker III wants to encourage.
The change "is unlikely to cause any ripples or stresses or discombobulations" if it is enacted into law, said Assistant Treasury Secretary Roger Mentz.
The panel also agreed not to impose a 5 percent withholding tax on interest income earned here by foreigners, as Packwood originally proposed.
The committee put off consideration of an amendment proposed by Sen. Max Baucus (D-Mont.) to deny Americans working in Libya in defiance of President Reagan's executive order the tax exemption for income up to $80,000 usually available to U.S. citizens working abroad.
The changes in foreign taxation would raise $6.4 billion in revenue over five years compared with $13.7 billion in the House package. Altogether, the day's actions put Packwood's legislation $29 billion in the hole; if taxes are not raised elsewhere, the legislation would increase the federal deficit by that amount over five years.
Packwood said he believes the committee will "pick it up" later in the tax-writing process, and that considerable progress had been made by approving the bond provisions, which had been the subject of heavy lobbying.
The committee begins taking some big-money votes today, with action scheduled on Packwood's proposal to limit the value of such individual deductions as the one for state and local income taxes for people in the highest proposed tax bracket of 35 percent. That provision alone would bring in $21.1 billion.
The provisions did not involve a great deal of revenue -- the Senate plan would lose $5.6 billion in revenue while the bond provisions of the House measure would raise $3.1 billion -- but represented a powerful political issue.
The package would permit state and local governments to continue issuing traditional general-obligation bonds without limit, but would cut back on so-called private-purpose bonds, in which up to 25 percent of the proceeds of the issue are used by a private business even though the interest paid on the bond is tax-exempt.
According to the Joint Committee on Taxation, the volume of long-term tax-exempt bonds issued each year has grown from $30.5 billion in 1975 to $114.3 billion in 1984 to an estimated $230 billion in 1985.
The Packwood plan would retain current-law limits on the volume of those bonds that can be issued each year, but would discourage issuers from investing the proceeds for a quick profit rather than spending them immediately for the purpose for which they were intended.
Several types of bonds, such as those for multifamily housing, were not included in the volume limitation. An amendment by Sen. John Heinz (R-Pa.) would permit bonds to pay for private-purpose mass-transit facilities, such as a boutique built in conjunction with a subway, without limitation.
The committee also agreed to an amendment by Sen. John Danforth (R-Mo.) to remove limits on the amount of outstanding bonds nonprofit universities could hold.
The panel did agree to a proposal by Baucus that effectively would deny the use of tax-exempt bonds to an Irish company that wants to set up a large dairy farm in Georgia, at a time when the United States is trying to curtail dairy production.