Municipal bonds

The Business Section of today’s New York Times had an article about a possible elimination of the tax exemption currently granted to the interest accrued on municipal bonds.  Under current I.R.S. law, if you by municipal bonds, the interest you get is not taxed at the federal level.  Evidently, President Obama and Speaker Boehner are close  to agreeing that the exemption should be eliminated, at least for the taxpayers in the top brackets.

I  called Lois, a friend of mine who is a tax consultant, and asked her to explain this whole issue.  Lois said that--for example--if you buy a Pennsylvania municipal bond, you are exempt from federal and Pennsylvania income taxes, so you need to figure out whether the lower tax rates will offset the lower interest rates you get on the municipal bonds.  Obviously the agencies issuing municipal bonds would like to continue the exemption, because they can keep their interest payments at a lower level than private bonds.

Here’s the kicker.  Lois told me that generally the minimum you need to invest in municipal bonds is $10,000.  I don’t know how many of my readers have $10,000 sitting around to invest, but I have a feeling it is a small number.  Here we have a debate on a tax policy, that, let’s face it, involves only a small percentage of Americans.  The amount at stake is approximately $32 billion.

My partner, who reads my postings for typos, vehemently disagrees with this message.  As a former local government official, she points out that the average taxpayer benefits from the sale of municipal bonds.  Bridges are built, flood control dikes are erected, infrastructure improvements are made because people are willing to invest in municipal bonds even though the interest rates are lower, because the interest is tax exempt.   My response is, yeah, but the rich are the people who still benefit.  She is looking at the infrastructure improvement.  I’m looking at the class warfare aspect.