MuniLand

Obama proposals could shift municipal bond buyers

By Cate Long
September 13, 2011

Obama would pay for jobs bill with 2013 muniland tax changes

The White House released draft legislation yesterday for the $447 billion American Jobs Act of 2011 which outlined proposed changes in the tax code to offset its major component — the extension of the payroll-tax reduction. The President’s proposal would raise income taxes on the wealthy by limiting income that can be excluded from taxation, mainly by limiting this exclusion for interest earned on municipal bonds.

This income tax increase for the more well-to-do would come into effect for taxable years beginning on or after Jan. 1, 2013. Generally, municipal bond ownership is concentrated in the higher tax brackets. From the Bond Buyer:

Internal Revenue Service data from 2009 shows that 58% of all of the tax-exempt interest reported to the IRS was from individuals with incomes of $200,000 or higher, Fabian said.

If the President’s proposal were adopted it would certainly limit demand for muni bonds from the highest earners and cause municipal bonds to be issued and traded at higher yields. But as we’ve seen in the past year there are other substantial pools of crossover buyers who have been attracted to municipal bonds in the current, low interest rate environment.

Take the $9.8 billion of 2011 State of Texas Tax and Revenue Anticipation Notes due on August 30, 2012 (CUSIP: 882722L90), which are currently trading at a yield of 0.24 percent. This one-year municipal paper is rated at the highest short-term level by the three major rating agencies and is paying 0.15 percent more than a comparable U.S. Treasury bill. The excess yield in the Texas paper could attract money-market funds, insurance companies, pension funds and wealthy European and Asian buyers who are seeking higher returns than sovereign bonds. In the bond markets it’s always a function of the spread, or excess return of one bond or class of bonds over the others. Cash flows to assets which offer the best yield for equivalent risk.

Beyond the question of crossover buyers for the municipal space there is the question of the political viability of the President’s proposal, which I don’t think is good. After all, state and local governments have a powerful constituency in Congress and there doesn’t appear to be an interest group that would take this issue up and push it through. The whole deal seems politically untenable given the resistance of Republicans to tax increases. We will see what unfolds.

The strangest part of the President’s proposal for muniland though was the provision to exempt “private activity” bonds from the alternative minimum tax. From the Bond Buyer:

The legislation also would exempt from the alternative minimum tax all private activity bonds issued in 2011 and 2012. The American Recovery and Reinvestment Act enacted in February 2009 exempted tax-exempt bonds issued in 2009 and 2010, but the provision expired on Dec. 31.

Why the President would want to favor “private activity bonds” is unclear. Private activity bonds are a type of municipal bond issued to finance various types of facilities owned or used by private entities, including airports, docks and certain other transportation-related facilities; water, sewer and certain other local utility facilities; solid and hazardous waste disposal facilities; certain residential rental projects (including multi-family housing revenue bonds).

Overall the President’s proposal seems like a mixed bag of politically untenable proposals. We will be watching for more reaction from various interest groups.

Further:

Self-Evident: The unintended consequences of the American Jobs Act of 2011

Felix Salmon: Cutting municipal tax deductibility won’t hurt infrastructure investment

The painful postponement

The longer the pain is postponed, the more intense the medicine needed to cure the illness. Central Falls, Rhode Island, which recently filed for bankruptcy, put off raising property taxes to fix their pension problems for years and now there is really no reasonable solution other than a bankruptcy court. From the Providence Journal:

In 1991, when the state stepped in during the city’s last major fiscal crisis and took over the city school system, the move was hailed as a bold masterstroke that was going to get the city back on its fiscal feet.

Rather than fixing the problem, it only postponed it.

The idea back then was for Central Falls to use its status as the only Rhode Island city that didn’t have to pay for schools as a chance to take the long view and replenish its accounts. Instead, successive mayors and City Councils used the situation to avoid property-tax increases for 10 years, while simultaneously ignoring annual warnings from their auditors that the city was failing to keep up with its obligations to its employees’ local pension funds, a Journal review of municipal finances shows.

@Twitter Talk

The New Yorker @NewYorker The New Yorker
The rise & fall of the US Postal Service in 14 New Yorker covers, & artist David Macaulay on this week’s cover: nyr.kr/pVgenh
Michael Pietronico @MillerTabak Michael Pietronico
any proposal to limit the tax breaks on municipal bonds will see substantial “push back” from states and cities -game just getting started
Open State Project @openstates Open State Project
checking DNS propagation of our new domain, openstates.org should show you our site, please reply if it doesn’t work
Randall Jensen @randalljensen Randall Jensen
Oregon PERS to release names and monthly benefits of its 110,000 retired members after legal settlement – Oregonian - http://ow.ly/6s5EV
Cate Long @cate_long Cate Long
“34-day negotiation window between Jefferson County, AL & creditors holding $3B of its debt ends this week” bloom.bg/oOldAJ

+ Good links +

Institutional Investor: Pension Funds Diving Into Infrastructure Investments

CUSIP: CUSIP ID Requests Forecast Surge in US Corporate Debt and Municipal Bond Issuance; Declines in International Debt Issuance

WPRI: Quick hits from the final pension advisory group meeting

Comments
2 comments so far | RSS Comments RSS

Charles Samuels, a partner at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., said it is ironic that Obama is trying to pay for his legislation, which focuses on providing federal assistance for infrastructure with a proposal that will hurt tax-exempt bonds, which states and local governments use to finance infrastructure projects.

“There’s going to be less value for tax-exempt bonds and more burden on states, local governments and charities even though they’re the ones we’re counting on to provide infrastructure and services,” he said.

http://www.bondbuyer.com/news/-1030977-1 .html?CMP=OTC-RSS

Posted by FPecar4525 | Report as abusive
 

Section-by-Section Analysis and Explanation of the
“American Jobs Act of 2011″

http://taxprof.typepad.com/files/explana tion.pdf

Posted by Cate_Long | Report as abusive
 

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