Obama Proposes Limiting Muni Tax Exemption

The President did not release any analysis of the effect of this proposal on the municipal market, on investors, on issuers, or on local taxpayers and ratepayers who would have to bear the cost of the increased in debt service that would result from this proposal.

The new muni bond tax would apply those taxpayers with adjusted gross income above $250,000 for a family ($200,000 for individuals) and who would be in a tax bracket of at least 36 percent when all of the municipal bond interest and the disallowed deductions (such as mortgage interest, charitable contributions, and state and local taxes) are added in.

The new muni bond tax would be effective for interest received on or after January 1, 2013 and would apply to interest received on all municipal bonds, including existing, outstanding bonds.

The amount of the tax on the municipal bond interest would be at a rate equal to the difference between 28 percent and the investor’s tax bracket.  As an example, if a taxpayer were in the 36 percent tax bracket, municipal bond interest would be taxed at 8 percent.  There would be increases in the Alternative Minimum Tax for those taxpayers who are subject to the AMT.

The BDA will vigorously defend the municipal market and we will keep our members informed of developments.

We urge you to contact your members of Congress in opposition to this proposal and also to engage your issuer clients to do so as well.

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