Municipal Bonds Being Taxed?!?
I just read somewhere that the America Jobs Act under Obama wants to start taxing municipal bonds for people in the highest tax brackets (anyone over 28%). Apparently they are going to make 28% the maximum allowable for tax free income, and anyone over will have to pay the difference (33% bracket - 28%= 5% in taxes on income). Can anyone explain this further or have any other information on the subject to share?
You are correct. I doubt it passes in whatever form it is now, but if it did pass and was enforced you pay your tax bracket minus the 28% like you said. This most likely will reduce the demand for the local bonds and increase the borrowing cost as the locality will have to raise it's yield for new issues to attract buyers. Old issues could sell off similar to a time when rates rise. Another issue is localities could raise taxes to pay for the lack of demand for the taxable munis.
Nov 2012 can't come fast enough.
It's in the constitution that the federal government cannot tax the states (or issues of the states). i seriously doubt that the law will pass...
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I'd fact check the constitution comment. http://www.archives.gov/exhibits/charters/constitution_transcript.html
Muni taxation is an IRS reg, much easier to change. Also, we need to remember that the primary intent of the tax exemption was to make muni offerings more atrractive to investors with less borrowing cost to the issuer. The tax benefits were supposed to be secondary.
Studies have shown that 80% of the benefit accrue to investors rather than the issuer. From the stand point of a rational tax policy muni's are a failed strategy. It would be less expensive overall for the Fed to issue a direct subsidy to the states borrowing costs offset by the increase in fed tax revenue.
Tough on HNW investors who have invested heavily in muni's for the tax benefit, at least in the future. Existing muni's would probably be grandfathered.
What do you think would happen to the price of existing muni's if the tax benefits are grandfathered?
Flip side, what happens to existing issues if the tax benefit is not grandfathered?
Might be a play either way
Taxable Municipal Bonds
There are situations in which a governmental issuer will sell taxable municipal bonds because the federal government will not subsidize the financing of certain activities that do not provide a significant benefit to the general public. Investor-led housing, local sports facilities, refunding of a refunded issue and borrowing to replenish a municipality’s underfunded pension plan are just four examples of bond issues that are federally taxable. Taxable municipals offer yields more comparable to those of other taxable sectors, such as corporate bonds or bonds issued by U.S. governmental agencies, than to those of tax-exempt municipals. The growth of the taxable municipal market in recent years has been astounding. In the last five years alone, over $134 billion in taxable municipals have been issued.