WASHINGTON — A taxpayer with a marginal income tax rate of 7.5% would have been indifferent to purchasing high-rated tax-exempt or taxable corporate bonds last year because there was only a .35% spread between these bonds, a joint Congressional committee concluded in a report issued Monday.

The Aaa-rated corporate bond rate averaged 4.64% while the rate for high-grade munis averaged 4.29%, according to the report. Those with higher income rates would have benefited more from buying tax-exempt bonds and those with lower rates should have bought corporate bonds, the 52-page report by the Joint Committee on Taxation suggests.

The 7.5% implied tax rate of the marginal investor for 2011 — that is, the rate at which there would be the about the same benefit for an investor purchasing a high-grade muni or high grade corporate bond — is much lower than the 15.8% implied tax rate for 2010 and 12.6% rate for 2009, according to the JCT.

The lower rate is due to the fact that the issuance of new muni bonds dropped in 2011 to its lowest level in 10 years, the JCT said. In addition, the committee said, reports projecting high default rates of state and local governments and some instances of high-profile defaults by certain issuers increased investors concerns about risks and led them to demand higher rates.

The report also said state and local governments issued an average of $384 billion in tax-exempt bonds annually over the period of 2002 through 2011.

The JCT wrote the report for a hearing the Senate Finance Committee plans to hold on Wednesday on tax reform and what it means for state and local tax and fiscal policy.

The report contains detailed descriptions of tax-exempt bonds, as well as taxable tax credit and direct-pay bonds. It summarizes the tax law requirements for these bonds. It also contains information about state and local tax revenues.

Five witnesses are scheduled to testify at the hearing, which is to begin at 10:00 am, but none of them represent state and local governmental issuers.

The witnesses are: Frank Sammartino, the Congressional Budget Office’s assistant secretary for tax analysis; Kim Rueben, a senior fellow at Urban-Brookings Tax Policy Center; Walter Hellerstein, the Francis Shackelford Distinguished professor of taxation law at the University of Georgia School of Law; Joseph Henchman, vice president of legal and state projects at the Tax Foundation; and Sanford Zinman, owner of Zinman Accounting in White Plains, N.Y.


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