Don't tread on our tax exemption: Muni coalition

Muni bond players band together to retain favored tax status of municipals

Oct 10, 2012 @ 3:24 pm

By Dan Jamieson

Worried about the potential loss of the tax exemption for municipal bonds, a group of market participants is forming a lobbying coalition to ensure that the favored tax status of municipals is retained.

The group, Municipal Bonds for America, is being spearheaded by the Bond Dealers Association, a collection of regional underwriters.

The coalition is bringing together underwriters and issuers, said Mike Nicholas, chief executive of the BDA. Continued talk about ending or limiting muni bonds' tax exemption was the impetus behind the new group, he said.

“With tax reform coming up in 2013, we really feel the need for a coalition,” Mr. Nicholas said.

Representatives from 17 bond underwriters and a few issuers are the initial members, including the National Association of Local Housing Finance Agencies, which represents entities in the affordable-housing market.

“As an issuer, we recognize the importance of this [tax exemption] issue,” said Marc Jahr, president of the New York City Housing Development Corp., which is a member of the NALHFA.

“We can bring our experience and knowledge of this market to our representatives in Washington,” Mr. Jahr said. A loss of the exemption “would seriously hurt our ability to create affordable housing.”

Stepped-up attacks

Proposals to end the tax exemption are nothing new. So far, the idea has gone nowhere.

But members of the new coalition worry about what they see as stepped-up attacks.

President Barack Obama has supported capping the value of the tax exemption at 28% for high earners and has proposed resurrecting the Build America Bonds program, under which municipalities issue taxable bonds and get federal subsidies to reduce interest costs.

Some economists have argued that this direct subsidy is more efficient than an outright tax exemption, which ends up benefiting underwriters and high-income investors, as well as states and municipalities.

But bond underwriters and some issuers don't want to risk giving up the exemption in exchange for the uncertainty of federal payments.

Meanwhile, Republican presidential candidate Mitt Romney has promised to end unspecified deductions to pay for his proposal to lower tax rates. The municipal bond tax exemption could well be one of the tax expenditures to hit the chopping block, as it is viewed by some as a loophole for rich investors.

But if municipals are taxed, that will raise costs to issuers, Mr. Nicholas said, “and that would raise the cost of things like water and sewer bills on all taxpayers.”

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