Muni Bonds Would See Tax Hike In Recent Tax Reform Proposal

Muni Bonds Would See Tax Hike In Recent Tax Reform Proposal

US Representative David Camp (R-MI), the current chairman of the House Ways and Means Committee, released a comprehensive tax reform proposal that, among many other changes, would reduce the tax exemptions that make municipal bonds so attractive to investors. Even if this bill does get out of committee, some of the ideas that are being introduced could find their way into future tax reform legislation and are still worth analyzing.

Tax reform a ‘shot across the bow’: Friedlander

“We believe that state and local issuers should view this highly detailed proposal as a ‘shot across the bow’ with a number of provisions—and inherent flaws—that are likely to be reintroduced in the future when and if Tax Reform is undertaken in earnest,” writes Citi analyst George Friedlander.

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One of the big changes in the Camp proposal is that high-income individuals (those currently in the 39.6% bracket) would pay a 35% tax rate, including a 10% surtax. Tax-free interest income, and many other forms of deductions, wouldn’t count against the 10% surtax, meaning that income from tax free bond payments essentially get hit with a 10% tax.

The bill would get rid of private activity bonds’ (PAB) tax exempt status, arguing that the government shouldn’t be subsidizing private companies’ borrowing costs, but Friedlander notes that PABs are often used by non-profits such as universities and hospitals, and that when for-profit entities use equivalent financing tools they would still get to d