MuniLand

Municipals are a small part of the American Jobs Act

President Obama held a ceremony on Monday in the Rose Garden, complete with a backdrop of teachers and law enforcement officers, to promote his American Jobs Act. The President has insisted that his proposal would be fully paid for by tax increases on the wealthy. What was less reported was that the $447 billion of proposed tax increases, Section 401 in the legislation (page 134), would not occur until 2013 and would stretch over 10 years. So under the President’s proposal there would need to be tax increases of approximately $47 billion a year from 2013 through 2023.

It’s been reported that Republicans are cool to the President’s proposal and it’s likely that they will object to paying for new stimulus programs with revenue generated in the next decade. In addition, the President’s proposal for $447 billion in tax increases will have to be added to the $1.5 trillion of savings that the Congressional super-committee will be looking for. So if the President’s proposal is embraced, the super-committee will need to find $2 trillion of savings from the federal budget over the next 10 years.

The bulk of the proposed tax increases in the President’s plan will come from adjustments in the deductions allowed for municipal interest and itemized deductions for individuals earning over $200,000 per year. This would account for about $400 billion of tax increases over ten years.

An additional $47 billion of taxes would come from levies on corporate jets, oil and gas companies, and hedge fund and private equity carried interest.

As the media began to report on these proposals, investors in municipal bonds took notice, worried that if adopted these reforms would be a first step to end the tax exemption for interest income on municipal bonds. What is not clear when you look at the specific language of the legislation and the statistics from the Internal Revenue Service is that this proposal would have a very big effect on muniland.

Obama proposals could shift municipal bond buyers

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.

Obama proposes direct aid to local governments

Obama proposes direct aid to local governments

Among the proposals made by President Obama in his jobs speech last night was his call for the federal government to fund the costs of public school teachers, firemen, policemen and first responders fully. This appears to be the only direct cash subsidy for jobs in his plan.

The American Jobs Act, if enacted by Congress, would specifically allocate $30 billion in funds for teachers and $5 billion would support the hiring and retention of public safety and first responder personnel. Using 2010 Census data this would provide a subsidy of approximately 12% to local governments for their elementary and secondary educator’s expenses and 8% for police and firefighters. The 2009 Recovery Act allocated $47 billion to local governments for teacher salaries so this proposal is about 40% less.

President Obama’s plan also includes “$25 billion investment in school infrastructure that will modernize at least 35,000 public schools.” While sounding good it’s important to point out this would give each school about $715,000 in funds for renovations. It’s helpful but not really a substantial amount.

Local governments’ tough choices between payrolls or bond payments?

Harrisburg walks the well worn path

The capitol city of Pennsylvania, Harrisburg, is functionally if not legally bankrupt. Yesterday the City council voted against the mayor’s rescue plan which would have brought them a small reprieve but would not have fixed their core financial issues. The city’s main problem is a grossly expensive incinerator project which has burdened the city with way too much debt. Their situation is similar to the sewer system woes of  Jefferson County, Alabama on about one tenth the scale. Like Jefferson County, anger about bondholders being prioritized ahead of the needs of citizens was on display at yesterday’s city council meeting. From Reuters:

“Wall Street gets paid and Main Street gets the shaft,” Councilman Brad Koplinski, who voted against the plan, said during the angry, packed council meeting.

At the root of Harrisburg’s troubles is a complicated financing scheme used to fund a state-of-the-art revamp of its trash-burning incinerator that left the city saddled with a $300 million debt.

All men’s wealth will be equal

It’s hot in Washington DC and Congress will return soon to figure out how to balance the federal budget. Part of the equation is likely to include raising more tax revenue. It’s easy to picture the thousands of lobbyists on K Street polishing their Gucci loafers and sharpening up their arguments to protect the interests they are hired to lobby for. There is no more epic battle in Washington than when tax benefits are being redrawn. The federal pie is getting smaller, and the battles will be fought in close combat.

As the struggle around taxation heats up you hear two recurring arguments. First is the idea that if you raise taxes on the upper-income earners you would kill the incentive to invest in job creation. And because job creation is the most essential need of our economy, raising taxes on the wealthy would kill the golden goose. Saying that raising taxes hurts the “job creators” is generally a Republican talking point. The other common argument is one of fairness. This is a liberal talking point, although it should be one embraced by all elected officials representing “the people.”

In his well-circulated New York Times op-ed, Warren Buffett talked about the unfairness of the low tax rate for those who earn income from their wealth as opposed to those who earn their income from their wages:

It’s the military, stupid

The U.S. Chamber of Commerce has published a letter to Congress’s new Joint Select Committee, aka the supercommittee, with the changes they would like to see made to the budget and tax code. The supercommittee’s brief is pretty broad; it will be looking at ways to balance the federal budget by raising taxes and/or reducing expenditures.

The Chamber, which represents business interests, strongly insists that the supercommittee slash entitlements and reform the tax code by lowering tax rates. From the Chamber letter:

The Chamber urges you to consider how the current tax laws act as an impediment to worldwide competitiveness, a deterrent to saving and investment, and an obstacle to innovation and entrepreneurship. Accordingly, the Chamber believes that the current code needs a comprehensive reform to lower overall marginal tax rates, to encourage saving and investment, to foster global competitiveness, increase capital accumulation, attract foreign investment, and drive job creation.

Modern American Bank™

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“The great difficulty with politics is that there are no established principles.”
- Napoleon Bonaparte (1769-1821)

Oh, America! It’s time to reinvent you. You are mired in a deep and prolonged slump. Economic activity keeps slowing. Our political class has been viciously testing the boundaries of their adversaries. We are faced with a lot of bills coming due and we are broke. What can be done?

I’ve been advocating a new type of effort involving the government and the private sector to rebuild and recharge America by creating a federal infrastructure bank funded by U.S. corporate offshore profits. These corporate profits would be repatriated at a 0% tax rate (current law requires their taxation at 35% if brought back to America).

Know your debt load

A quick and dirty way to evaluate the credit quality of a borrower is to look at his debt load relative to revenues. It’s not a perfect measure — it doesn’t take into account whether that debt is repaid over many years or whether it’s all due at once, for instance — but it suggests why investors view some states as better risks than others. I’ve made a set of charts so we can compare debt loads and revenues for the states in a simple, visual way. The amount of debt load is indicated by the full height of the bar. (Please note the vertical scales of the charts vary. California is the highest borrower by far.)

I’ll do another series of charts that includes pension liabilities and other post-employment benefits, and I’m warning you now: that set will look scary. Here is a link to these data and charts in interactive format. Feel free to embed and use them elsewhere (crediting Reuters of course).

Tax collection data is from the U.S. Census Bureau and debt load data is from Standard and Poor’s.

Irresponsible debt practices

Politicians start telling the truth

In response to Moody’s placing the state’s Aaa credit rating on review, Tennessee’s News Channel 5 filed this story and video, two very good examples of a state government reacting to a possible downgrade. In the video, municipal bond expert and Metro Councilmember Emily Evans says:

There is no getting away from the fact that we have engaged in debt practices that have been irresponsible and we are going to pay a price and we need to pony up and pay it.

Our massive debt load is a large issue overhanging America and a big bump in the road to economic recovery. Facing the facts and telling the truth are necessary to start the process of getting fiscal houses in order.

Proximity to the madness

More alarms are ringing in muniland today. Moody’s issued a statement announcing that it was putting on review five states which have Aaa ratings. Aaa is Moody’s highest rating, and the agency is concerned that knock-on effects from the federal government could weaken the ratings of these states.

I made this chart detailing the specific rationale Moody’s used for each state from the statement they released today. Note that states which have a large dependence on federal jobs and contracts dominate the list. ————– Sensitivity to natl trends Fed workers as % of employment Fed contracts as % of state GDP Medicaid as high % of budget Low rainy day fund Maryland *** *** New Mexico *** *** *** South Carolina *** *** *** Tennessee *** *** *** *** Virginia *** *** *** ***

 

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