Alert April 29, 2011

Will Tax Reform Hurt the Municipal Bond Market?

The U.S. House of Representatives recently approved Representative Paul Ryan’s 2012 budget proposal.  Ryan’s proposal, dubbed “The Path to Prosperity,” is the latest in a string of Republican proposals that emphasize tax reform as a path to recovery. The various reform proposals typically include a reduction in marginal tax rates and the elimination of various tax preferences, each of which poses a challenge to the traditional tax-exempt bond market.

The following are some features of several budget and tax initiatives that have been proposed:

Representative Ryan’s Fiscal 2012 Budget Proposal

  • Reduce top tax rate to 25%
  • Eliminate or limit tax expenditures to broaden tax base

National Commission on Fiscal Responsibility and Reform

  • Remove tax exemption for new municipal bonds
  • Reduce top tax rate to 25%; tax capital gains and dividends as ordinary income

Representative Schakowsky’s Deficit Reduction Plan

  • Raise wage cap on social security taxes
  • Tax capital gains and dividends as ordinary income

Domenici-Rivlin Debt Reduction Task Force

  • Retain tax exemption for public purpose municipal securities
  • Reduce top tax rate to 27%; eliminate most tax expenditures to broaden tax base
  • Impose new 6.5% debt reduction sales tax
  • Tax capital gains and dividends as ordinary income

Stiglitz-Roosevelt Institute

  • Eliminate tax preferences and reduce tax rates
  • Devise a more efficient mechanism than municipal bonds to aid state and local governments

Representative Tierney’s Tax Reform Bill