Americans are getting richer, setting up the municipal bond market for a bounty of opportunity.
New data from the IRS, analyzed by Western Asset Management Co., show adjusted gross income in the US increased $2.2 trillion in the 2021 tax year — a 17.5 percent surge — making it the highest year-over-year jump in the past two decades. The increase comes as many US households bounce back from a pandemic-induced slump where millions faced job cuts.
“Individuals have gotten wealthier and are falling into higher tax brackets, and these individuals can benefit more from muni incomes than they could in the past,” Western Asset’s Samuel Weitzman said.
The municipal bond market has seen robust demand from investors who have taken advantage of a drop in borrowing costs ahead of the first expected rate cut from the Federal Reserve. The market has been seeing a supply and demand imbalance as a slew of investors are eager to enter the market.
Weitzman wrote in a note on Tuesday said that wealth levels are a key driver of taxing power for state and local governments, and that recent data from the IRS have supported record-high tax collections and favorable municipal credit quality.
Municipal bonds have historically been attractive for high-income earners — the exemption from federal, state and local taxes makes them a catch among the wealthy. Additionally, the asset class often provides a safe haven for high-income individuals when politicians float more levies. An electoral victory for President Joe Biden in November would pave the way for a potential windfall for US state and local-government debt after his call for sweeping tax hikes on corporations and the wealthy.
Biden’s proposals — which include raising the top income tax rate and a 25 percent minimum rate on households worth at least $100 million — stand to make that trade more attractive, boosting demand for debt that states and cities sell to finance infrastructure projects.
States that saw the greatest increases in adjusted gross income were led by Wyoming, with a 27 percent bump. Nevada saw a 26 percent increase and Montana jumped 22 percent.
With no surprise, New York, California and Texas recorded the strongest growth of high-income individuals.
Weitzman said that due to the strong recovery year in 2021, he wouldn’t be surprised if the data moderated in 2022 after seeing such a strong increase.
“As income trends and tax rates move higher, which seem more and more likely at some point given the federal deficits, the tax exemption value that municipal bonds offer will only increase,” said Nisha Patel, managing director at Parametric Portfolio Associates.
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