Reuters blog archive
from India Insight:
Arun Jaitley's first budget as India's finance minister should allow individual taxpayers to invest more money in vehicles such as government savings bonds, mutual funds and employee savings plans, and provide them with tax credits that would bolster their savings and boost economic growth, tax experts say.
Income tax rules allow for an annual exemption of 100,000 rupees ($1,700) in investments and expenditures such as life insurance and home loan repayments, a rule that has remained unchanged for about a decade. Such investments, along with public provident funds, employee provident funds, five-year term deposits in banks and equity-linked mutual fund savings plans are good for individuals and also help keep the economy on a strong footing, said Suresh Surana, founder, RSM Astute Consulting.
“Savings need to be channelized into economically productive avenues which are what Section 80C essentially provides for, investment either in government securities or bank deposits or life insurance,” said Surana.
These comments come as the Bharatiya Janata Party, which won parliamentary elections and installed Narendra Modi as prime minister in May, releases its first annual budget for the country on July 10.
About one third of the U.S. House of Representatives signed a letter to keep the current tax exemption for municipal bonds in place. Investment News got the story:
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.
— Cate Long (@cate_long) November 8, 2012
At the Bloomberg Link conference on Thursday, Matt Posner, of Municipal Market Advisors, said that discussion of the municipal bond tax exemption would likely be rolled over to the next session of congress, which begins January 3. Yes, the long awaited muniland battle is upon us. Strap on your armor.
The Joint Committee on Taxation is circulating an analysis of tax reform proposals, one of which includes removing the municipal bond tax exemption for all bonds issued after December 31, 2012. If the tax exemption is repealed or capped so that the federal government can collect more tax revenue, bond prices will fall. The higher yields would repay investors for their loss of tax exemption, nevertheless, groups are forming to oppose proposals to repeal the exemption.
Republican presidential candidate Mitt Romney has not indicated any specifics about how he would treat muniland in his tax reforms. President Obama has proposed changes. The Bond Buyer summed up the President’s position:
Chris Mauro, head of U.S. municipal strategy at RBC Capital Markets, sent around a comment note suggesting that the media coverage of the Senate Finance Committee hearing Wednesday that included discussion of possible changes to the taxation of municipal bonds was overheated:
Yesterday, the Senate Finance Committee held a hearing entitled “Tax Reform: What It Means for State and Local Tax and Fiscal Policy”. A simple reading of the media accounts of this hearing would lead one to believe that the entire event was dedicated to a detailed discussion of the future of the tax-exempt status of municipal bond interest. So we decided to review the tape of the hearing in order to see what in fact was discussed. In reality, the vast majority of the hearing was focused on two issues – the deductibility of state and local taxes by federal taxpayers and the ability of state and local governments to collect sales taxes on internet and catalog purchases.
from Expert Zone:
(The views expressed in this column are the author's own and do not represent those of Reuters)
Tax exemption under Section 80C is one of the major drivers of insurance sales. In fact, it has become a trend to launch a new variant of single-premium plans in February-March to cater to those who just want to make some investment to avail tax benefits.
In a series of decisions that may affect healthcare nationally, Illinois is tightening the noose on hospitals that claim tax-exempt, non-profit status. What began as the denial of a property tax exemption by the Champaign County Board of Review for one hospital system in 2002 has become a state-wide analysis of how much actual "charity care" hospitals are providing.
The immediate implication is that hospitals' property tax exemptions could be revoked and vital revenues could be collected. However, this raises a broader structural question around the use of tax-exempt municipal bonds for entities that may be passive vehicles for for-profit activity.
There is a very blurry line in muniland between truly public activities and private activities that allegedly have some public good, and into this ill-defined space, for-profit and non-profit organizations have found ways to issue tax-exempt municipal bonds. This gray area should be a prime target for Congress to examine when it goes looking for ways to raise more tax revenue from muniland.
It's easy to find these quasi-public projects. A quick look at the listing of today's new bond offerings on EMMA immediately produces this $29 million bond offering at the private Rollins College in Florida to fund the renovation of its science center, campus center and one of its residence halls. There is an additional $15 million bond offering at the college to refund bonds previously issued at a higher interest rate. These bonds are being issued through Florida's Higher Education Facilities Financing Authority, which is acting as public conduit for the private school. Rollins, an exclusive southern college, charges $50,400 per year for tuition, room and board. At these tuition levels it's hard to see how much good the general population receives.
Bloomberg had a great piece that rounds up the factors that made municipal bonds the best performing financial asset of the past year. The story is framed as a knock on Meredith Whitney for her scare call a year ago:
This was supposed to be the year the $3.7 trillion state and local debt market would be rocked by an exploding pension time bomb and “hundreds of billions of dollars” of defaults, according to analyst Meredith Whitney.
The weakest states are stronger than US banks
I noticed something very interesting in some research that Markit, a data provider that tracks the credit-default swap market, released yesterday: the worst U.S. municipal credits (California, Illinois and New Jersey) are considered much stronger than all the major U.S. banks save JP Morgan. New York state is considered stronger than Mr. Dimon's bank!
Why this is especially important in muniland is that these U.S. banks write a lot of credit-default swaps insuring the debt of these large states, which seems upside-down given that credit markets view the banks as weaker than the states they insure. This raises questions about the validity of the whole muni CDS market. I'll dig around on this issue a little more.