Bloomberg News reports that one of the ways President Obama wants to pay for his proposed $450 billion "jobs" bill is to limit the federal tax exemption for municipal bond interest income. What would the consequences of this be? One possibility would be to curb borrowing by state and local governments. That'd probably be a good outcome. Another possibility is that state and local governments would keep borrowing the same amount while raising taxes or cutting services (laying off police, firefighters, and teachers) to pay for the higher interest costs they'd have to pay now that they have less in the way of tax-exempt income to offer bond-buyers. That would probably be a less-good outcome. A third possibility is that the jobs bill passes, with federal spending to protect the jobs of teachers, police,and firefighters as part of it. Then the increased federal revenue from taxing municipal bond interest would just flow back to the state and local governments. The effect would be more power for Washington, since money that was once raised directly at the state and local levels is now run through Washington. A fourth possibility is that some of the money now invested in state and local bonds would begin to flow instead to corporate stocks and bonds, which would start to look more attractive on an after-tax, risk-adjusted return basis. That could be a good thing. A fifth possibility is that the money that was in state and local bonds now flows instead to Treasury bonds. If Treasury Secretary Geithner is worried about finding takers for all that newly authorized federal borrowing, what better way is there to make sure there are customers at those Treasury auctions than to raise taxes on the competing bond issuers, the state and local governments?
Obama Targets Municipal Bond Tax Deduction
https://www.futureofcapitalism.com/2011/09/obama-targets-municipal-bond-tax-deduction
by Editor | Related Topics: President Obama, Stimulus, Taxes, Timothy Geithner receive the latest by email: subscribe to the free futureofcapitalism.com mailing list