Municipal Bond Forum
Tampering with exemption creates more problems than it cures
Q
I read recently that both Gov. Romney and President Obama are trying to make tax-free muni interest taxable. I would assume that if it did happen, it would only affect new issues. Do you have anything you could tell me on the likelihood of this happening and if it would affect current issues?
A
James A. Klotz responds:
Rather than eliminating tax exemption, President Obama’s proposal would cap the value of the tax exemption at 28%. This was included in the administration’s American Jobs Act, unveiled in September 2011.
We have not seen anything from the Romney camp endangering tax-free interest. Although Gov. Romney has discussed limiting tax deductions, municipal bonds are not considered tax deductions as they are purchased with after-tax dollars.
Regardless of who comes out on top on Election Day, any attempt to tamper with muni bond tax-exemption creates more problems than it cures. It would raise borrowing costs for already-strapped state and local governments, discourage capital investment and cost jobs. Ironically, public improvements would then require the federal government to subsidize municipalities, completely defeating what it is trying to accomplish.
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