Thumbs down on Obama’s muni tax

September 19, 2011

Thumbs down on Obama’s muni tax

Unsurprisingly, the Treasurer of California and Bloomberg’s editorial board are pushing back on the Obama administration’s proposals to reduce the municipal bond tax exemption for those earning more than $200,000 per year. I wrote previously how the Republicans are cool to the proposal. The California Treasurer says that the increased tax would raise municipal borrowing costs and estimates that over time the act could add $2.7 billion to $7.7 billion to statewide borrowing costs. Bloomberg’s editorial board goes further and suggests that any changes to municipal bond taxation should be done as part of a broader tax reform effort. From Bloomberg:

How disruptive would this new tax, which the administration estimates will bring in $30 billion a year, be for the muni market? A report from Morgan Stanley Research saw little impact, pointing out that the premiums investors demand to hold munis over Treasuries “have little direct relationship with tax rates historically.” A report from Citigroup Global Markets, by contrast, argued that curbing the exemption would “increase state and local borrowing costs significantly.”

On balance, we suspect the impact on interest rates will be relatively small initially. (Certainly the proposal has had little effect on the market since the announcement, according to Bloomberg pricing data.) Of course, that could change rapidly if historically low Treasury yields rise and munis start to look less attractive.

If the aim is to help states build infrastructure and create jobs, Obama’s proposal starts to look somewhat unserious, given that it would probably make public-works projects more expensive. When one considers its chances of passing in Congress — approximately 0.0 percent, according to the latest Bloomberg View calculations — it starts to look downright disingenuous.

One element of the discussion which has been left out is that the U.S. municipal market has been shrinking and that individuals hold only about 29% of outstanding municipal bonds. Reuters reports:

The central bank’s estimate of state and local governments and authorities’ outstanding bonds has come under fire lately, with the market’s main information gatherer, the Municipal Securities Rulemaking Board, saying the real market size is closer to $3.7 trillion.


Individuals are still the largest holders of municipal bonds, accounting for $1.07 trillion of the market in the second quarter.

The effect of various tax proposals on municipal borrowing rates, including full removal of any tax-exempt status, should be analyzed against the various classes of muni bond ownership. U.S. tax-exempt organizations, for instance, control $8.2 trillion in assets; if municipal bonds became taxable they could prove to be a great asset class for pension funds and other organizations which do not pay taxes on interest income. This is also true for personal retirement accounts like 401Ks, which are not taxed until savings are withdrawn.

Overseas buyers have already been increasing their purchases of municipal bonds. Recent data from the Federal Reserve shows that foreign investors bought $8 billion in the second quarter and $8.8 billion in the first. I think it’s a fallacy that the rich are the only ones who have demand for municipal bonds. Many groups of buyers could be prospective buyers for municipal bonds, depending on their tax status.

Jefferson County half way home

The Jefferson County Commission met Friday and voted to adopt a preliminary settlement agreement with their creditors. This action averted what would have been the largest U.S. municipal bankruptcy to date. But there is more ahead for the county and state because the agreement requires that the state legislature adopt certain provisions of the creditor agreement.  From Bloomberg:

Concluding the accord hinges on Governor Robert Bentley’s ability to persuade the Legislature to create an independent sewer authority to issue new debt backed by a so-called moral obligation pledge from the state. Lawmakers also will be asked to shore up the county’s general fund, which is facing a $40 million gap in its operating budget, after a state court struck down a levy on wages. The governor has said he would call a special session to act on an agreement.

“There is a lot left to do to make the settlement work,” Bentley said in a statement. “I look forward to continuing to work with county commissioners and legislators in preparation for a special session of the Alabama Legislature so that we can pass laws necessary to move forward with the settlement and to address the county’s general fund budget issues.”


BHam News: Jefferson County needs about $50 million authorized by state to stay out of bankruptcy trouble for 2012, Carrington says

@Twitter Talk

The Economist @TheEconomist The Economist
An uptick in press mentions of recession bodes ill for the world economy.
Municipal Bonds @munibonds Municipal Bonds
Obama Signs Bill Extending FAA, Highway Spending
LynnHume @BondBuyergirl LynnHume
Rep. Quigley draft bill would put disclosure responsibility on issuers…
Barrett and Greene @GreeneBarrett Barrett and Greene
Useful resource: Overview of open records & open meetings laws in all 50 states & DC
Angry Bear blog @angrybearecon Angry Bear blog
One comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see

Obama’s muni tax is one of the most absurd proposals coming out of this supposed “Democrat” administration. This is something we’d expect from Romney or Perry, but Obama?

When cities and states are just now repairing their finances after getting hit by the double wammy of the ’08 financial crash and the Great Recession, Obama tries to eliminate the tax deductibility of muni interest!!

It just goes to show that Obama has encircled himself with neo-conservatives who wear the Democrat badge as a press pass.

If the purpose is to raise more revenue from the upper 1% earners, then pass a Wealth Tax: 2% Wealth Tax on all persons, corporations, trusts, foundations, etc. that have a net worth greater than $10 million. That will balance the budget in just a few years.

Posted by Acetracy | Report as abusive