As part of the February stimulus package, Washington offered new inducement for municipalities to issue taxable bonds. The program may have the effect of pushing up tax rates for the wealthy.
Some background: municipalities generally issue tax-exempt bonds, attracting investors — often wealthy individuals — who like the bonds because the investments lower their overall tax bill.
But lots of big institutional investors, like public pension funds, don’t pay taxes, so they don’t need the bonds’ tax exemption.
The stimulus’s “Build America Bond” program addressed this issue. Under the program, municipalities can issue taxable bonds at the higher interest rate such bonds command, and the feds simply subsidize the higher cost by making a direct payment to the municipalities.
So far, municipalities have issued $13.4 billion in Build America Bonds.
But the program, as Municipal Market Advisors points out, is a means “to increase the progressivity of the US income tax.”
If taxable muni bonds grow relative to the tax-exempt market, wealthy individuals will have fewer opportunities in the tax-exempt market to reduce their tax bills.
Meanwhile, they’ll be paying the cost of the subsidy for the taxable bonds, since they pay disproportionate federal taxes.
“Should demand among … buyers and issuers remain strong, policy makers are very likely to renew the program,” MMA notes.
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