Municipal analysts and bond market participants are giving mixed reviews to both presidential candidates’ tax proposals, saying either plan could prove disastrous to the municipal bond market.
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Munis are already threatened at the state level because of states’ struggles with increased pension plan costs and lower tax revenues. Multiple states have already filed for bankruptcy.
Both candidates want to overhaul the tax code, citing it is too complicated.
Romney says he would lower overall tax rates by 20% and completely eliminate the alternative minimum tax (AMT). He says he would pay for these reductions by eliminating enough loopholes and tax preferences to keep government revenue collections on par.
He has not specified which loopholes would be closed or which tax preferences would be eliminated.
Obama wants to extend the current tax laws only for people earning less than the $200,000 individual and $250,000 per couple income thresholds used by the Medicare surtax.
He also would impose the so-called Buffet rule that would impose a 30% tax rate on those earning more than $1 million in adjusted gross income including capital gains and dividends. The Build America Bonds (BAB) program, created in 2009 under the American Recovery and Reinvestment Act, would also be reinstated.
Muni market participants said increasing tax rates and imposing the Buffet Rule would make munis more attractive. The BABs program would offer the greatest benefit in improving the stability and strength of the muni market.
But Obama also proposed in a jobs bill for 2013 a 28% limit on the value of tax-exempt interest for the wealthy. Under a Romney administration, the tax exemption for municipal bonds could be eliminated entirely.
So, although the Buffet Rule and higher tax rates would make munis more attractive, capping the value of tax-exempt interest would dampen investor interest.
The overall conclusion was that under either administration, muni bond investments
stand to be disadvantaged compared to other investments.