OBAMA PROPOSAL STUNS MARKET

[dkf]

WASHINGTON — President Obama’s jobs bill proposal to cap tax-exempt interest for higher-income taxpayers surprised muni bond market participants and was seen as a betrayal by some issuers who, according to one analyst, could have to pay about $10 billion more in added interest costs over the life of their muni bonds if the proposal is enacted.

While most market participants don’t think the American Jobs Act stands a chance of approval by Congress, several tax experts warned that the cap on tax-exempt interest is ominous sign for future debates on deficit reduction and tax reform because it’s now on the table for discussion and would have to be part of any proposal to cut income tax rates.

Matt Fabian, a managing director at Municipal Market Advisors, said state and local issuers could end up paying about $10 billion in additional interest costs over the life of their bonds.

The estimate is based on two assumptions: that an investor who wants to buy a 5% coupon bond and is paying a 28% tax rate would need to receive an extra 50 basis points to replicate the after-tax current yield produced with a 35% marginal rate; and that the market returns to a more normal rate of issuance of about $300 billion per year.

Most market participants said lawmakers will never pass the jobs bill, but warned about the implications of the president’s proposal.

http://www.bondbuyer.com/issues/120_177/muni-reaction-obama-jobs-bill-1031028-1.html

[hack89]

1. This is not good for local tax payers. nt

[dmallind]

2. Which of course assumes bond BUYERS muat be made whole

There is no reason this need be the case. Since all bonds will pay lower net returns because of increased taxes on the interest, the playing field is level.

[dkf]

4. Bond holders will just move to a taxable equivalent yield.

They have the entire universe of bonds to pick from.

[Exultant Democracy]

3. Tax exempt interest on bonds is a terribly inefficent subsity

this will cost people in the top tax bracket who invest in Bonds about $10 but save the taxpayers probably around $15 billion.

[frazzled]

5. Looking to a bond-buying site to criticize this proposal?

That's like looking to the insurance companies to assess health care policy.

Try various economics policy web sites for a better range of viewpoints.