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How the Build America Bond Program Will Impact Municipal Bonds

In the latest legislation from the Obama Administration, the Create America Bonds (BABs) initiative seeks to help distressed local governments and states around the US. The scheme, which is included in the 2009 American Recovery and Reinvestment Act, creates taxable municipal bonds, an extreme contrast from Munis’ long-time tax-exempt status quo.

Whereas the issuer receives a direct subsidy equivalent to 30% of the bond voucher or maybe a stated interest ranking, while bonds issued under the BABs program are completely taxable. The aim is typically to establish a variety of advantages for investors beyond the highest possible tax ranges from conventional muni bonds.

For several years, the Treasury Department and the IRS have been arguing that the tax exemption for municipal bonds is an ineffective subsidy since the tax exemption provides tax-exempt income for the biggest taxpayers. The top employees at current tax rates do not pay thirty-five% of the income. Of course, the gain would increase if taxes increase.

 

The BABs Program would have major advantages in the event that it is funded by lower backers who need to have their investment’s taxable income. The scheme would promote the recovery of the funds needed by municipalities through the inclusion in the municipal bond arena of a broad brand new group of investors.

 

The effect this program could have on current municipal bonds that are tax exempt is a little questionable. The BABs plan, instead of refinancing the previous debt, allows only bonds to be issued for entirely new ventures. An issuer is unable to issue old debt BABs. There is also little risk that municipal bonds will be repaid early, if the BABs program is gaining considerable impetus. As a consequence, many of the current bond view are simply not disqualifiable. More to the point, the need for existing problems by the most major tax payers can rise dramatically if new issues of tax exempt bonds are virtually non-existent.

 

Some program critics claim that, while BABs may have some incentives for those outside the highest possible taxation brackets, the richest will undoubtedly continue to earn the highest rewards. While that may be the case, I welcome the target of the program to get the middle income person to the bond market. It might very well add up to investments (such as CDs), and a major victory for municipalities in the parts of the country that are suffering at this moment.

 

However, perhaps the biggest winners will be the old-style, duty free versions of municipal bonds currently owned. We tell our customers to keep their excellent tax-free bonds from Arizona.

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