States are moving to cap their taxes, and that’s not good news for municipal bond holders.
That’s because the caps limit municipalities’ ability to charge whatever taxes are necessary so that they can make payments on their bond obligations, says Bloomberg columnist Joe Mysak.
“New Jersey may be the latest state to teach investors that not all general obligation bonds are backed by the unlimited taxing power of a municipality,” Mysak writes.
Republican Gov. Chris Christie plans to ask the legislature to place a proposal to cap property tax increases at 2.5 percent a year on the November ballot.
“Unless it exempts debt-service payments, the cap is bad news for bond buyers,” Mysak explains. “Tax caps raise barriers between municipalities and their tax bases, and their ability to repay their debts.”
In Massachusetts, voters approved a property tax cap in 1980.
“The Massachusetts tax cap, which may be a model for New Jersey, is a quagmire of many exceptions as applied to debt service on municipal bonds,” John Kraft, a municipal bond lawyer at Lomurro, Davison, Eastman & Munoz, told Mysak.
“In New Jersey, bond ordinances already are subject to referendum if the voters wish to reject a capital improvement.”
Tax caps or no, many experts say muni bonds are headed for a fall.
"Too much money has stampeded in," Marilyn Cohen of bond manager Envision Capital told The Wall Street Journal.
© 2014 Moneynews. All rights reserved.