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Congress’s faulty assumption on advance refunding bonds


I agree with your article, “Reviving Advance Refunding Bonds.” Why aren’t issuers and bond attorneys fighting back?

The government’s position is that having additional tax-exempt debt outstanding in parallel with unrefunded debt diminishes federal income tax receipts. Perhaps so, but similarly, interest on U.S. Treasuries is exempt from state and local income taxation. This means that as the feds expand debt issuance, states suffer in exactly the same manner as that about which the feds are whining. Fair is fair and what’s good for the goose is good for the gander. Fight back! The Government Finance Officers Association and individual states should sue.

The reality for investors is that in the absence of refunded bonds, most tax-exempt bond buyers would likely choose to just invest more money in high-grade munis and not in taxable-interest securities, so the government is chasing a ghost.

What dope came up with this idea, anyway?

M.C., Maryland


James A. Klotz responds:

You’re right.

Congress is making the absurd assumption that eliminating these tax-free bonds will cause municipalities to issue taxable securities and provide the federal government with $17 billion in revenue over the next 10 years.

The writers of the tax bill needed to show increased revenue to offset other promised tax breaks.

Dope seems kind.

May 17, 2018

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