Tax-free municipal bonds might not be so free if Romney becomes presidents

By Dian Vujovich

One of the subjects discussed at the 4^th Annual SIFMA Municipal Bond Summit in New York this week was the fate of tax-fee bonds.

While Romney’s economic policies have never been detailed and thus are foggy at best, should he become the next president of the United States, there are concerns about whether municipal bonds will loose their tax free status. If that were to happen, the carnage would be ugly for everyone from the taxpayers in the higher income brackets who invest in tax-free munis to the building of services in our cities and the employment of American workers.

From Randy Snook’s opening comments at the summit, he is the executive vice president of the Securities Industry and Financial Markets Association (SIFMA):

“The municipal bond market is one of the most important financial markets that SIFMA serves. Munis are the backbone of America, providing the funding necessary to build and maintain the schools, roads, hospitals, and other infrastructure that ensure the livelihood of our communities. These infrastructure projects also create much-needed jobs – jobs that otherwise might not exist without the capital raised by munis.”

Now a little history.

In 1918, thanks to the Supreme Court ruling in the case of McCulloch v. Maryland, municipal bond holders have not have to pay federal income tax on the interest payments received from muni bonds. Then in 1913, the IRS adopted a tax code reaffirming that the interest earned on municipal bonds be exempt from federal taxation.

The move helped create what today is a $3.7 trillion dollar  municipal securities market. Investors, indeed love their munis.

According to Snook, there has already been $252 billion in muni issuance this year. “That’s up 53 percent from last year.” He added that the Bond Buyer 20 Bond Index shows the cost of borrowing for state and local governments is at its lowest level in 45 years.

The thought of taking away the tax-free aspect on municipal bonds is more than worrisome. Doing so would cost us millions upon millions of dollars, add to our tax burdens, impact retirement incomes, muck up the cost of funding any future municipal projects in cities, counties and states all around the country, etc..  And could add to, instead of subtract from, our deficit.

Bottom line: No matter what your income level is taking the tax-free out of tax-free municipal bonds would be a costly  idea. Period.