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Deep within the Obama Administration's plan to create jobs is an idea that won't. In fact, it would likely cost jobs, raise the borrowing costs for already-strapped state and local governments, discourage capital investing and disrupt the $2.9 trillion municipal bond market.
Fortunately, this ill-conceived brainstorm has virtually no chance of passage.
The proposal to which we refer would limit the tax benefit on municipal bonds to 28% for individuals who earn more than $200,000 a year and couples earning more than $250,000 per year. The exemption for earners in the highest tax bracket is currently worth 35% per year.
As Bloomberg pointed out, attacks on the tax-exempt status of municipal bonds date back almost 100 years, when Andrew Mellon served as treasury secretary under President Warren G. Harding. It made no sense then and is an even worse idea now.
An equal-opportunity destroyer
The administration is trying to sell the proposal as a way for the rich to pay their "fair share." Notwithstanding the fact that high earners already account for the lion's share of tax revenue, attacking the tax exemption on muni bonds is an equal-opportunity destroyer. By making it more costly for states and local municipalities to borrow, capital projects would likely be delayed or canceled.
With states already facing budget difficulties, why would the administration want to further drive up their costs? And how does the proposal square with the administration's purported goal of putting people to work and rebuilding the nation's infrastructure?
There is little support for this proposal, and most legislators and market participants see no chance of its passage. Consequently, when the idea surfaced last week, yields on existing bonds didn't budge. Even the administration has been virtually silent on the plan.
Tax reform that would take a comprehensive approach to eliminating loopholes and inequities must be a priority. But a piecemeal approach, which targets a financial mechanism that has been integral to the growth and prosperity of the country and is fraught with unintended consequences, should and will be rejected.
This report is produced solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. This report is based on information obtained from sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed.