Tax reform is back in muniland headlines. Naomi Jagoda of the Bond Buyer has the details:
House Ways and Means Committee chairman Dave Camp’s draft tax reform plan, released Wednesday, would terminate the tax exemption for private-activity bonds and advanced refunding bonds issued after 2014.
As expected, the plan would create three individual income brackets — 10 percent, 25 percent and 35 percent — and would tax a portion of muni bond interest, which is currently tax-exempt, for those in the highest bracket. The surtax would apply to individuals with incomes of $400,000 or more and couples with $450,000 or more of income as well as all munis they hold, whether new or outstanding.
It would essentially cap at 25 percent the value of tax exemption for those in the 35 percent tax bracket, sources said. The surtax would be unprecedented and would likely dampen demand for muni bonds and raise borrowing costs for state and local governments, market participants said.
Camp’s proposal singles out high earners, above $400,000 for an individual and $450,000 for couples, to tax their municipal interest at 10 percent. I pulled the most recent IRS data and there were about 432,000 taxpayers with incomes above $500,000 who filed returns in 2011 and claimed tax exempt interest ($500,000 is the closest income break in the IRS tables). Their total non-taxed municipal interest was $25.56 billion for 2011 or an average of $59,000 per taxpayer. At the very top of the table 9,186 taxpayers earned $4.2 billion tax exempt interest or $458,000 for each taxpayer. Interestingly, in the highest income brackets the number of taxpayers collecting tax-exempt interest and taxable ordinary dividend income are roughly the same (see chart):