In the Pursuit of Wealth Destruction, Muni Bond Tax Seems Unlikely

The American Jobs Act is a bill which is supposed to be “fully paid for.”  It isn’t.  In the attack on wealth at all costs, the measure to tax municipal bond interest for the wealthy ($200K individuals and $250K households) is already coming under fire.  When Obama made his speech last week, we noted that the line in the sand was just drawn much deeper.  Including the muni-tax is something that his the bond sector of investors a bit up in the air.  The good news is that most of what we have found and most of what we have been told directly by market participants indicates that this tax is probably a bit of an over-reach.

We have been reviewing many comments on this matter and have some serious questions about the effort to tax muni-bonds for the wealthy.  Are the sub-$250K households about to pick up all the slack in the Municipal bond market?  Highly unlikely.  Meredith Whitney has already scared the non-investor class away from munis with her predictions of impending waves of default from cities, counties, and other municipalities.  Sadly, Mr. Obama’s tax ambitions may only make that possibility come closer to the truth.

If there is one asset manager that matters when it comes to municipal bonds, it is Nuveen Asset Management.  Nuveen has more municipal bond funds than anyone else that we have seen. The firm had more than $210 billion of assets under management as of June 30, 2011 and it has published a fairly scathing report called ‘Obama’s Jobs Bill Proposal to Restrict Municipal Tax Exemption: Likely a Non-Starter’

Nuveen noted, “The bill proposes to prevent individuals with incomes of $200,000 or more, and married couples with incomes of $250,000 or more, from deriving more tax savings from the use of tax-exempt bonds and other tax benefits than they would have if they were in the 28% tax bracket.”  It goes on to note, “Nuveen Asset Management believes that the proposal to modify the tax treatment of municipal bonds will ultimately be scrapped. In our opinion, the proposal lacks a broad constituency to support it and likely faces strong and coordinated opposition…”

24/7 Wall St. was forwarded some data from the public relations for the Glenmede fixed income team, a firm with over $20 billion in assets under management.  The team noted, “Their particular focus is on the tax-exempt income aspect. Despite their comments, it’s important to note that their assessment says this has a low probability of passing, but a high probability of stirring passionate investor discussion.” Glenmede’s figures on taxing munis:

  • Punitive to high tax bracket investors and all issuers;
  • Existing bond prices would fall modestly;
  • Future issuance costs would increase;
  • Under current tax rates, 10-year municipal yields would increase approximately 32 bps and 60 bps if top marginal rates increased to 40%.

Glenmede’s team further noted, “While we do feel as though tax-exempt bonds are under attack and the probability of a significant change at some point in the future has materially increased during the past two years, we don’t believe this proposal has a high probability of passage.”

We were also given a direct comment from Bryon Townsend, a Certified Financial Planner for W.R. Anderson & Co, LLC in Houston, Texas.  Townsend noted, “President Obama’s attempt to put caps on the “tax-free” status of muni bond income is another attempt to throw something against the wall without thinking about the actual impact in the real world.  This attempt to tax the wealthy, will put even more financial pressure on already struggling State and City governments by increasing the amount they will have to pay to issue debt.  It is seems careless that, in his jobs bill, Obama will risk crippling the one sector of our economy that is already having largest job losses.”