What do municipal bonds have to do with Obama’s American Jobs Act? Well, according to Barron’s
Municipal bonds have always been synonymous with tax-free income. That would end if President Obama gets his way.
Under the jobs bill the President sent to Congress Monday, high-income individuals and families would no longer receive interest from state and municipal bonds free completely from federal income taxes, beginning in 2013. The legislation would also reduce the value of tax deductions for taxpayers in the highest bracket.
Kind of a back door tax increase designed to pay for his $447 billion spending bill as we go down the road. It’s sure not paid for now.
As a result, upper-income investors would suffer the dual blow of lower after-tax income and capital losses from their muni-bond portfolios.
That could severe repercussions for the muni market, which only in recent months has recovered from the so-far errant prediction of hundreds of defaults totaling billions of dollars from analyst Meredith Whitney.
“In my opinion, this will have a negative effect on the muni market and could start another wave of heavy withdrawals from muni-bond funds, even though many investors in these funds will be minimally affected,” says Ken Woods, who head Asset Preservation Advisors, an Atlanta manager of bond portfolios specializing in high-net-worth individuals. “The muni investor’s thought process will be, ‘the government’s next step could be the complete elimination of the [tax] exemption.’”
So, those evil rich people would not invest as much in municipal bonds, and could pull some of their money out. Which means there would actually be less money raised from the taxation change. Wow, good plan, Mr. Obama!
One of the ironies of this proposal in the so-called jobs bill is that the measure contains infrastructure spending, some $38 billion worth. It would also create an infrastructure bank to fund such projects.
But reducing demand for bonds issued by state and regional authorities that build highways, bridges, airports, water and sewer systems and transportation projections would hamper the very sort of projects the legislation seeks to encourage.
Wow, perfect! Now, eventually those evil rich people might start investing more of their money back into munis, years down the road, as they come to terms with the new rates. In the meantime, they’d bail, meaning less money for those same projects. Unless Obama plans on having the federal government take over the state and local governments and paying for it all at the federal level (?).
This is what happens when you have academics with no real world business experience crafting legislation: they can’t conceive of the likely real world outcomes. They feel that conditions will stay static, and, in this case, that means that investments in munis will remain the same, leading to higher revenues for the government. Which will not happen, of course.
There are many other taxes in this bill, such as limiting itemized deductions on only those making $200k individual/$250k joint filing, which could easily be challenged under the equal protection clause, something one would think our Constitutional teacher president would know. There would be a change to the way “carried interest” is taxed (there is bipartisan opposition to this idea). Oh, and taxing the oil and gas industry, which would supposedly raise $40 billion, meaning $40 billion in higher costs to the American people.
Meanwhile, the legislation includes selling unused wireless spectrum. This creates jobs how? It’s nice that it can be use for first responders, but, this is not a job creator.
And this little newspaper, the Beaufort Observer, lays out perfectly why Obama’s bill won’t work.