As Katrina states push for bonds, critics doubt they?ll help recovery

State-government and securities lobbyists are pushing for congressional approval of tax-free bonds intended to lure businesses back to the Gulf Coast, taking advantage of new outcries for spending vigilance to sell lawmakers on the bonds’ minimal impact on the deficit.

Support for the bonds could be dampened, however, by turf fights between state and local officials over disbursing power and the spotty record of similar tax exemptions passed after the Sept. 11 attacks to help downtown New York City, where rebuilding has lagged. There is also the question of whether to add debt-service relief — direct federal assistance to municipalities already struggling to pay off existing bonds — to any post-hurricane business-aid bill.

“In many cases of outstanding debt, there is a revenue stream designed to pay off those bonds, and that revenue stream probably went underwater,” said John Vogt, a lobbyist and executive vice president at the Bond Market Association, the trade group representing securities giants such as Charles Schwab and HSBC.

In the case of a community that levies property taxes to cover the interest payments on already-issued tax-free bonds, Vogt said, “Assume all those homes are destroyed. Money’s not coming in to pay those property taxes. How are they going to pay off the bonds?”

With the help of Congress, if the National Association of State Treasurers (NAST) has its way. While the association has not weighed in on exactly how much debt-service relief its members would prefer, said federal relations director Chris Allen, the group is arguing for tax-free-bond provisions with a maximum amount of freedom for state and local governments to allocate exemptions and grant money.

“Our big thing is maintaining state flexibility to address needs they have without undue federal interference into what they’re up to,” Allen said.

But some New York City officials credit federal interference with saving the Liberty Bonds program, Congress’s $8 billion incentive for new construction in the so-called Ground Zero downtown neighborhood where the World Trade Center once stood. Liberty Bonds were supposed to sunset at the end of last year before lawmakers extended the tax exemptions until 2009.

While the $1.6 billion round of residential Liberty Bonds has been snapped up, about half of the commercial bonds have yet to be used. Some financial-services lobbyists privately acknowledge that no tax holiday will be powerful enough to sway businesses that have already decided not to rebuild in Katrina’s footprint.

Ed McClellan, a former Senate Finance Committee chief of staff who now lobbies for Alston & Bird, said lawmakers and staffers face a far more complex universe of needs from state and local lobbyists than existed after Sept. 11.

“It sort of boggles my mind a little bit,” McClellan said. “There could be a level of tension between federal and state [interests] over what to do with the money, and also between state and local.”

George Yin, the Joint Committee on Taxation’s chief of staff, alarmed state-government and securities lobbyists earlier this year by suggesting tighter restrictions on tax-free public financing, including a ban on issuing new state and local bonds to pay off existing debt. The bond-market group, the treasurers association and 22 other trade associations created a lobbying coalition, Built by Bonds, to counter Yin’s proposals, though he will play bond Cassandra for only one more month before leaving the Hill for the private sector.

Conservatives leading the push for offsets to federal hurricane spending have embraced the concept of indirect assistance that would not further dent the deficit, with some Republican Study Committee members considering federal Katrina bonds.

Still, Vogt noted the pitfalls of overly broad debt-service relief, as well as the need to set strict criteria for tax-free-bond eligibility, lest Gulf Coast business owners make a bid to game the system.

“Sure, I’m hearing concerns about how much it would cost, and Congress is doing its due diligence,” Vogt said.

Senate Finance Committee Chairman Chuck Grassley (R-Iowa) has already fielded requests from Gulf Coast governors for $45 billion in new tax-free bonds, and aides expect to hear similarly staggering numbers during a second business-relief hearing Thursday. Committee spokeswoman Jill Gerber said hurricane bonds might be combined with “Gulf Opportunity Zones,” the White House-backed plan for large-scale tax and debt-service relief in the affected area.

House Ways and Means Committee Chairman Bill Thomas (R-Calif.) and the top committee Democrat, Charles Rangel (N.Y.), have indicated their support for private activity bonds as part of the business-targeted tax package the panel will soon take up. But Rangel said that between tax exemptions and $70 billion in permanent tax cuts, something might have to give from the business priority list.

“Republicans have a mandate, and I don’t see how they’re going to fulfill it, then say they want tax cuts,” Rangel said. “We hope they do, so the American people will see they can’t support the president on Katrina and be faithful to the conservative element. It just can’t be done.”

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