The Bond Buyer reports on congress looking into possibly doing away with the tax exemption on new Municipal Bond offerings. This is a risk that most will hush away as an impossibility. However Investment Mercenary favorite Jeffrey Gundlach hasn't nor have I. See: Gundlach: Two Ways to Lose in Munis
Senators Ron Wyden (D) & Dan Coats (R) introduced tax-reform legislation to eliminate the tax exemption. They would institute in its place a tax credit scheme to allow certain tax advantages with the bonds. If the budget deficits continue with no realistic plan this sacred cow for high tax states & investors could be in trouble. The budget problem is dire as I outlined in the post: Budget Crises Averted??? To fix the mess nothing will be safe when it comes to cutting or raising taxes.
Here are the consequences I see initially if this was ever to pass.
- Municipalities would see their interest costs go up significantly
- At this current time it would crater an already skittish market
- Less benefit for wealthy individuals to fund municipalities
- Municipalities would be forced to compete with other debt financing in the market place
- Municipalities would be forced to compete with all other debt financing creating a level playing field
- Competition would force municipalities have the same stringent accounting as other bonds
- Lower income investors would receive a much better yield that leads to a better tax benefit