Tags: Obama | muni | tax | exemption

Virginia Treasurer Criticizes Obama's Proposal to Curb Muni Tax Exemption

Wednesday, 08 May 2013 07:55 AM

By Dan Weil

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President Barack Obama's proposal to limit the tax exemption for municipal bonds is a bad idea, says Virginia Treasurer Manju Ganeriwala.

"This would make it more costly for governments, and ultimately taxpayers, to improve America's roads, ports, bridges, schools, hospitals, and even its water and wastewater systems," she writes in The Wall Street Journal.

That's because 75 percent of public infrastructure projects are built under the auspices of state and local governments, and tax-exempt muni bonds are the principal vehicle to finance them, Ganeriwala says.

Editor's Note:
The IRS’ Worst Nightmare — How to Pay Zero Taxes

Obama's proposal would cap the tax exemption at 28 percent for the top 2 percent of taxpayers in terms of income, thus cutting the tax benefit for the nation's most wealthy citizens.

"Consider someone in the 39.6 percent bracket earning $100,000 in municipal-bond interest; he currently pays no federal income taxes on that interest. After a 28 percent cap, he will pay $11,600 in federal income taxes — and demand a higher return to offset the tax burden," she explains.

"Limiting the tax exemption would reduce investor demand for municipal bonds and raise the interest states and localities would have to offer to attract the investments they need," Ganeriwala writes.

"Had the tax-exemption limit been in place from 2003-2012, it would have cost state and local governments an additional $173 billion of interest on infrastructure investments, according to an analysis by the Securities Industry and Financial Markets Association."

Meanwhile, some financial commentators have raised concern about bankruptcies in the muni market. But, "despite the few, well-publicized municipal bankruptcies, they have been rarities resulting from particular circumstances," writes Randall Forsyth of Barron's.

"As for defaults this year, Bank of America Merrill Lynch counts some $573.2 million failing to meet their obligations, 0.6 percent of the $3.7 trillion of munis outstanding, compared with 1.01 percent for all of last year."

Editor's Note: The IRS’ Worst Nightmare — How to Pay Zero Taxes

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