Exhale: Lawmakers back status quo on muni bond tax exemption

The municipal bond market’s dogged efforts to prevent President Barack Obama from tinkering with the 100-year-old tax-exemption for muni bond income has received some high-profile support from 137 members of Congress.
A letter supporting the status quo for the muni tax exemption, and signed by 95 Democrats and 45 Republicans, was delivered today to Speaker of the House John Boehner and minority leader Nancy Pelosi.
In addition to pointing out that over the past decade muni bonds have funded more than $1.9 trillion worth of infrastructure construction, including $179 billion last year, the letter essentially asks Mr. Boehner and Ms. Pelosi to not support the president’s budget proposal that would cap the muni bond tax exemption at 28%.
“Eliminating or capping the current deduction on municipal bonds would severely curtail state and local governments’ ability to invest in themselves. It would increase borrowing costs to public entities and shift costs to local residents through tax or rate increases,” the letter states.
Even though this level of tax reform isn’t considered a top priority for the Obama administration, the muni bond market is taking no chances and sees this letter as a positive sign for the $4 trillion muni bond market.
“This is not legislation. It’s just a letter, and members of Congress publicly support stuff all the time, but when you have this many co-signers and this much bipartisan support it shows real understanding and support up on Capitol Hill,” said Mike Nicholas, chief executive of the Bond Dealers of America.
“It’s impossible to say with any certainty if there’s a chance of this 28% cap happening, but the fact is it’s clearly on the table,” he said. “We know there’s support from the White House and the Treasury to cap or eliminate the exemption.”
The lack of support in Congress could be a double-edged sword, said Peter Coffin, president of Breckinridge Capital Advisors Inc.
“Nobody in Congress is really fighting for the 28% exemption, which makes me worry that it could end up getting bargained away,” he said. “In spite of the fact nobody is in favor of it outside of the administration, I think it’s still a threat.”
The exemption that allows income on muni bond income to be earned tax-free was established as part of the original 20-page income tax code, as it was written in 1913.