Obama Bill Would Restrict Use of Tax-Exempt Interest

The Bond Buyer reports:

The $447 billion American Jobs Act of 2011 that President Obama sent Congress late Monday would bar wealthy investors from using tax-exempt bond interest and other tax exclusions, expenditures and deductions to reduce their income tax rates below 28% — a proposal that would have significant adverse impacts on the municipal bond market.

The restriction would apply to single taxpayers with incomes of $200,000 or greater and married couples with incomes of $250,000 or greater. It would apply to taxable years beginning on or after Jan. 1, 2013.

“It would be dramatic for municipal bond demand,” said Matt Fabian, a managing director of Municipal Market Advisors. “It would mean higher income investors would pay less for municipal bonds and demand higher interest rates. Issuers’ borrowing costs would rise dramatically.”

Internal Revenue Service data from 2009 shows that 58% of all of the tax-exempt interest reported to the IRS was from individuals with incomes of $200,000 or higher, Fabian said.

This is a big story.