The threats to tax exemption are the most serious they have ever been since the Roosevelt Administration but the market can successfully defend it from lawmakers who are looking for more revenue, said a former  House committee tax counsel here at a conference.

Speaking at the general session at the National Association of Bond Lawyers 13th annual Tax and Securities Law Institute, John Buckley, who worked for House Ways and Means Committee Democrats, outlined some of the most pressing threats to the municipal bond industry.

“All of you should be engaged in the debate,” Buckley told nearly 400 NABL attendees. “I’d like to think I know how the process works in Washington, D.C., and in my opinion the most important influences on members of Congress do not come from Washington, D.C.”

While he told the audience that tax exemption can be successfully defended, he warned market participants that it is “completely unwise to ignore the threat at this time because it’s real.”

Apart from numerous congressional and White House threats to curb or completely eliminate tax exemption, it’s actually a very good time for municipal bonds, Buckley said. The value of tax exemption is greater than it was last year due to recent tax law changes.

“The fiscal cliff legislation and the health care legislation have fairly dramatically increased the tax benefits that the value of the exemption,” Buckley said.

Last year the maximum tax rate on interest was 35%, he pointed out. This year, it will be close to 45% because of the combination of the increase on the ordinary marginal tax rate, the new Medicare surtax on investment earnings, and the reinstatement of the Pease proposal.

Buckley listed several arguments lawmakers have used against tax exemption including that it’s inefficient, it interferes with allocation of resources for the economy and that it only benefits the wealthy.

“My defense of tax-exempt bonds is based on infrastructure,” Buckley said. “There are positive economic benefits from greater investment in infrastructure and they are observable. They are not the theoretical promises that have never come to fruition from these economic theories.”

Finally, Buckley said that if changes to tax exemption do occur they will likely be in connection with an increase of the public debt ceiling this summer or with legislation that proposes to reverse the across-the-board federal budget cuts that took effect on March 1.

“Even in the past when we had a functioning legislature, issues like this were never handled separately,” Buckley said. “They were always part of a tax reform plan or a budget plan.” 

  Next Tuesday, March 19, Buckley said he will be one of the witnesses at the House Ways and Means Committee hearing that will analyze tax provisions affecting state and local governments, including municipal bonds.

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