Alert October 19, 2011

President's Debt Reduction Plan Threatens Muni Market

President Obama recently delivered a draft of his Plan for Economic Growth and Deficit Reduction (the “Debt Reduction Plan”) to Congress. The Debt Reduction Plan provides for a steady reduction of the nation’s outstanding debt as a percentage of gross domestic product. If certain targeted ratios are not met in a given fiscal year, however, the Debt Reduction Plan provides for automatic cuts in spending and tax preferences – cuts that could adversely affect the tax exemption with respect to municipal bonds.

Another plan recently introduced by the President in the form of the $447 billion American Jobs Act of 2011 (the “Jobs Act”) also contained provisions that threatened the tax exemption on municipal bonds.  The U.S. Senate recently defeated the Jobs Act by a vote of 50 to 49 (60 votes were needed for cloture). If adopted, the Jobs Act would have capped the amount of tax-exempt interest, and other related expenditures and deductions, to 28% for all individuals earning $200,000 or more and for married couples earning $250,000 or more. The White House has indicated that the President intends to split up the Jobs Act into smaller pieces for resubmission.

The one-two punch of the Jobs Act and the Debt Reduction Plan has shaken the municipal bond market. At the National Association of Bond Lawyers’ Bond Attorneys’ Workshop, recently held in San Antonio, Texas, industry concern was expressed in a panel called “Tax Reform Update.”  Panelists agreed that the already suffering municipal bond market could be irreparably damaged by continued attacks on the exclusion of bond interest from gross income – the foundation of the market.