Debt Bill Could Hurt Munis

The Bond Buyer reports:

President Obama has sent draft legislation to the congressional deficit reduction committee that would have the potential to further limit the value of tax-exempt interest for higher-income taxpayers below the 28% level proposed in his jobs bill.

The 284-page Debt Reduction Act of 2011, which nonprofit publisher Tax Analysts released this week saying it was a draft circulating among lobbyists, would require the Office of Management and Budget to establish steadily declining annual ratios for debt as a percentage of gross domestic product beginning with fiscal 2013.

If the ratios were not met in any given year, automatic cuts in spending and tax preferences, such as tax-exempt interest, would be triggered.

“It would introduce a tremendous amount of uncertainly in the municipal market,” said Bill Daly, senior vice president for government relations at Bond Dealers of America. “Investors would exact a premium on state and local governments because of the uncertainty. It could also discourage trading during the time of uncertainty.”

This is a rather big issue because the growth in state and local spending could be deterred by limiting or wiping out the tax-exemption.