Off the Table, or Not?

By: James A. Klotz
President

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Off the Table, or Not?

By James A. Klotz, President

Does the White House want to limit the tax benefits of municipal bonds?

It’s hard to tell.

In a story Monday, The Bond Buyer, quoting unnamed "senior White House economic advisors", said the administration has backed away from its proposal to cap the value of the municipal bond tax exemption at 28%. The proposal was part of the administration's American Jobs Act, unveiled in September, which included tax cuts and new government spending.

Since the proposal was introduced, the White House heard from an overwhelming number of municipal officials and reconsidered the adverse effect it would have on already-stretched state and local government finances. The plan, it said, would be "off the table."

Apparently, something changed

Curiously, in a story today, "knowledgeable sources" told the industry publication that the cap would in fact be included in the president's fiscal 2013 budget. In a quote that raises more questions than it answers, a "White House official" said:

"The administration understands the importance of tax incentives for municipal finance. That's why we have supported Build America Bonds and why we did not include the municipal bond tax exemption in the president's State of the Union proposal to eliminate tax incentives for millionaires. But the administration has no plans to revisit the specific September proposal that would impose a 28% across-the-board limit on the value of tax preferences for high-income households."

Anyone searching for a definitive read on the situation would be hard pressed to find one.

The administration may have forgotten that their proposal last fall would limit the tax benefit on municipal bonds, as well as other tax expenditures and deductions, 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 we noted back then ("Job Bill Misfires in Attack on Muni Bonds" ), the plan would dramatically increase borrowing costs for state and local municipalities and would almost certainly delay or cancel much needed capital projects. It is also obvious, the proposal is at odds with its purported intention - to spur job growth.

Now there is confusion.

Because the original plan had limited support, there was virtually no market reaction when it was first introduced. And once again, its chances of ultimately becoming law are remote.

However, despite its lack of support in Congress and among state and local officials, two bipartisan commissions charged with recommending ways to cut the deficit and reform the tax code have recommended curtailing or eliminating the tax exemption on new muni bonds. Important for bondholders is the indication that in the unlikely event that tax advantages are curtailed, they could not be applied retroactively.

Fiscal reform is essential, but limiting the means by which our infrastructure is rebuilt and jobs are created - the basis of a sound economy - is foolhardy, and sadly, would be more costly to taxpayers after all is said and done.

2/2/2012

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.



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