Municipal Bond Forum
D.C. votes to tax out-of-state bonds
Q
The Washington, D.C. Council voted to, in effect, impose a new income tax of 8.5% on non-D.C. tax-exempt bonds, and to do so retroactively to Jan. 1, 2011. D.C. investors must now choose between just a few D.C. bonds (to remain exempt from D.C.’s income tax) or “out-of-state” bonds (to obtain diversification comparable to any state). What is your recommendation?
A
James A. Klotz responds:
Although the new tax looks like it will be enacted, it still needs to be signed by the mayor and approved by Congress. Once this becomes a “fait accompli,” D.C. residents will be forced to invest in either D.C. issues or U.S. territories (such as Puerto Rico or Guam) to avoid the tax entirely.
If considering out of state bonds, an investor must calculate the impact of the 8.5% tax to determine the after tax-return. This must be weighed against the advantage of diversifying into obligations issued in other states.
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