The Possible Repeal of the Tax Exemption of Municipal Bond Interest

You may have heard recently about proposals for Congress to remove the exclusion from gross income of interest on state and local bonds, usually referred to as “repealing the tax exemption on municipal bonds.”  This issue arose as a result of the leaking of a 51-page list of items to increase revenue or reduce expenses of the federal government being considered by the House Ways and Means Committee. 

Various projections have been offered as to the effect on the federal budget and issuers of municipal bonds.  The House Ways and Means Committee estimates the elimination of the tax exemption would generate $250 billion in revenue for the federal government over ten years.  Some analysis has concluded that this would translate to an estimated $824 billion increase in borrowing costs for municipal bond issuers over the same period and create significant disruption in the municipal bond market.  We at Bricker Graydon thought it might be helpful for us to take stock of where things stand currently.

About the only thing anyone knows for sure right now is that no legislation to repeal the tax exemption has been introduced in either the U.S. House of Representatives or the Senate.  The absence of legislation does not mean that there is no threat.  It just means that the nature of the threat is unknown.  Many questions exist, a partial listing of which could include:

• Will there be one bill including all Administration proposals or two bills, one of which will be focused on tax provisions?
• When will legislation be introduced?
• Will a repeal apply to outstanding bonds or just future issuances?
• Will any restriction be phased in gradually over time or will there be a specific cutoff?
• Will there be some type of volume cap to limit the total issuance of municipal bonds rather than outright repeal?
• Will Congress choose to limit the maximum amount of tax-exempt interest holders of municipal bonds can earn, rather than repealing the exemption altogether?
• What will the effect on the market be if the legislation has an effective date of the day of introduction versus date it becomes law? (This was the case in the mid-80s with several pieces of legislation.)
• Will governmental bonds be spared but the tax exemption for interest on private activity bonds ended?
• Will any changes to state law be necessary in light of an anticipated increase in borrowing cost?
• What kind of continuing disclosure obligations on state and local governments could be triggered by a repeal of the tax exemption?

Notwithstanding the number and complexity of issues surrounding this topic, Bricker Graydon is planning to closely monitor all developments in this arena as they occur.  We intend to inform our clients of specifics of any developments to the extent useful. We will not be passing along every rumor that comes our way.  We will, as we have always done, be a resource, a guide and an advocate for our clients in uncertain times.

If you have any questions on this topic, please feel free to reach out to your Bricker Graydon contact.