The One Issue Politicians Aren’t Fighting About

Klotz on Bonds

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<h3>James A. Klotz</h3>

James A. Klotz

Feathers are flying amid an especially rancorous political year, but there’s harmony among politicians on at least one important issue: the tax exemption on municipal bonds.

A bipartisan group of House members is mobilizing to fight attempts to limit the exemption, while about 600 state and local officials lined up against it, saying changes would cost jobs and raise the cost of infrastructure improvements.

“Tax exemption of interest on municipal bonds was implemented more than 100 years ago at the dawn of the U.S. income tax system,” said a letter sent to congressional leaders formulated by the National Association of State Treasurers and signed by scores of local officials.

“Proposals to change the commitments to tax-free municipal bonds would not only be costly for state and local taxpayers, but also result in fewer projects, fewer jobs and further deterioration of our infrastructure.”

Stiff resistance

As we’ve noted previously (“Jobs Bill Misfires in Attack on Muni Bonds”), the Obama administration has proposed several times since 2011 to limit the exemption as a way to raise revenue.

Its efforts, however, have been met with stiff resistance from both parties.

At the same time the letter by local officials was unveiled, Reps. Randy Hultgren, a Republican from Illinois, and Dutch Ruppersberger, a Maryland Democrat, announced the formation of the Municipal Finance Caucus.

The caucus is designed to “act as a forum to discuss the opportunities and challenges for states and local governments to independently fund initiatives that will strengthen their communities, and to advocate for bipartisan policies that enhance their access to the capital markets,” the congressmen said in a statement.

“Key issues that merit strong consideration include: protecting the tax exempt status of municipal debt, understanding how financial regulations treat such debt, and ensuring there is a robust market for municipal securities.”

Bulwark against the threat

While there appears to be no immediate threat to the exemption, congressional leaders are bracing for such an attempt.

In their letter, local and state leaders noted concrete effects on the municipal bond market when investors learned a change was being considered.

“The potential impact of the change is more than theoretical: in December of 2012 the municipal bond market experienced a spike in rates as investors recognized a cap on exemption was under consideration.”

James A. Klotz is the President of FMSbonds, Inc.
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Mar 10, 2016

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