Municipal Bond Forum
Changing tax-frees won’t float
Q
I recently read about “serious” proposals to remove the federal tax-free character of municipal bonds starting after 2011 and grandfathered to all munis issued before then. I know these kinds of proposals have been floating around forever, but this time it seems to have garnered much more support in Congress, mostly due to the dire budget situation of most states and localities, and also due to the recent success of Build America Bonds. If such a proposal were to pass, it would undoubtedly have disastrous consequences.
A
James A. Klotz responds:
You are correct. These proposals have been “floating around forever,” or at least as long as we have been in this business (over 40 years).
The reason they have never gained traction is no one has been able to offer a reasonable alternative for funding municipal purposes. Any attempt to replace traditional municipal bonds with tax credit securities would meet with major resistance from the issuing entities.
Regardless, there are no “serious” proposals that call for the elimination of the tax-free status retroactively. Accordingly, however remote the possibility of such a proposal being enacted, it would only enhance the value of tax-free bonds already in existence.
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