WASHINGTON — Proposed extensions to major bond provisions have survived several revisions of pending tax legislation, but municipal market participants are wondering if more controversial, non-bond provisions could scuttle the entire package.

While lawmakers in the Senate continue tweaking a tax package that would extend several expiring tax provisions, extensions to bond provisions — including the Build America Bonds program — have gone unchanged. In fact, a recent draft of a substitute amendment that circulated among lobbyists this week included all the bond provisions that were part of earlier versions of the bill, as Senate Democrats weigh scaling back other, pricier items, such as a $24 billion provision that would give states additional Medicaid funds.

Attempts to pass the American Jobs and Closing Tax Loopholes Act have repeatedly failed in the Senate due to concerns from Republicans and moderate Democrats that it would add to the deficit.

Muni market participants following the legislation worry that much more delay on the bill could significantly slow action on the bond provisions, given the Senate's rapidly approaching breaks and already-crowded schedule. The Senate is scheduled to break from July 2 to 9, and then from Aug. 9 to Sept. 10.

"The Senate's schedule is unclear … especially with regulatory reform likely coming forward next week," said Susan Gaffney, director of the Government Finance Officers Association's federal liaison center, who still was optimistic the provisions would eventually pass.

"We know that there is a lot of support for the various bond provisions … conventional wisdom trends towards Congress getting this done," she said.

One market participant feared the gridlock could push the bond proposals into 2011, after some have expired, leading to uncertainty in the market.

"The concern is that they peel off a few things and leave the rest until next year, which will adversely affect financings," said one market participant who did not want to be identified.

The BAB extension currently in the measure would extend the program for two years, and would lower the current 35% federal interest rate subsidy level to 32% for bonds sold in 2011, and 30% for those sold in 2012. The tax package also includes a one-year extension to the recovery zone economic development and facility bond programs, which would also be allocated another $25 billion in bond authority.

Another sought-after extension would extend by one year the greater small-issuer exemption for bank-qualified bonds. The American Recovery and Reinvestment Act had allowed banks to deduct 80% of the costs of buying and carrying tax-exempt debt sold by borrowers whose annual issuance is no greater than $30 million, an increase from the previous limit of $10 million.

It also allowed for the $30 million limit to be applied to individual borrowers participating in conduit deals, rather than the conduit issuer. The bill would extend these measures through 2011.

The bill also would extend for one year the exemption from the alternative minimum tax interest on all private-activity bonds, including those issued to refund debt sold after 2003.

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