Obama May Limit Tax Breaks on Muni Bonds

[Freddie Stubbs]

Source: Bloomberg

President Barack Obama proposed curbing the amount of interest from municipal bonds that top earners can exclude from their taxable income, a step that may diminish demand for state and local-government securities.

The president’s $447 billion job-creation plan would pare the tax break for municipal-bond interest to 28 percent for couples earning more than $250,000 a year. Such tax-exempt interest is currently worth 35 percent for earners in the top tax bracket because that’s the amount they would otherwise have to pay on their income.

Any move to limit the tax advantage for municipal securities would face resistance from local-government officials because the break bolsters demand for their debt, lowering the interest rates they pay when borrowing for public works. Investors in the $2.9 trillion market for municipal bonds are willing to accept lower returns because the income isn’t taxed.

“We’re very much opposed” to limiting the tax exemption, said Mike Nicholas, chief executive of the Bond Dealers of America, a Washington-based lobbying group for banks that underwrite municipal bonds. “You’re going to end up punishing state and local governments.”

Read more: http://www.bloomberg.com/news/2011-09-12/obama-jobs-plan-proposes-limits-on-tax-breaks-for-municipal-bond-investor.html