Municipal bond experts opposed the proposal to remove
longstanding municipal bond tax exemptions during a Securities
Industry and Financial Markets Association conference on
The proposal would remove the tax exemptions for investors
with annual incomes of $200,000 or more.
"Ideas out there have created this feeling that the
municipal tax exemption, rather than being a help to the state
and local governments, somehow gives a tax expenditure rather
than an exemption to get infrastructure done," said David
Madigan, chief investment officer at Breckinridge Capital
"And the impact I think this has on small issuers is huge,"
Small issuers would be less able to finance infrastructure
projects if the tax exemption is removed because of lower
demand for munis, Madigan said.
George Friedlander, managing director and senior muni bond
strategist at Citi, was also critical of the idea that state
and local governments could function well without the tax
"I note that even under [Build America Bonds] with a 35
percent subsidy, break-even costs between the tax exemptions
and [Build America Bonds] was around nine years by the end,"
Friedlander said. "For smaller issuers it was further out on
the curve than that."
Friedlander said removal of the exemption would increase the
level of debt service per million dollars of bonds issued, thus
lowering the capacity to fund projects for a given level of
Concern over the proposal is partially alleviated by the
belief that a retroactive removal of tax exemption for munis
would not pass a congressional vote.
"I think our own view is that the likelihood that [the
retroactive tax] will be introduced is pretty close to zero,"
said Alan Hart, managing partner and chief investment officer
at Cedar Ridge Partners.
"I can certainly see it being implemented for future
issuances that would be consistent with prior transitions in
the tax policy," he added.
Panelists expect the tax exemption on muni bonds to be a
point of contention for the foreseeable future, even though
they are confident the proposal will halt at the House of
"I'm a firm believer that when bad ideas start in Washington
they tend to continue to roll," Madigan said.
If Madigan's right about muni bonds, then traders, high
income investors and state and local governments should hope
he's wrong about Washington.