Financial whistleblower Michael Lissack is publishing a new 73-page book calling for the elimination of tax-exempt municipal bonds.
"The muni tax exemption is a giant wrong," said Lissack. "It has invited innumerable abuses, and it has this other major problem, which is unique in the securities universe, only with muni bonds do we have trust but never verify."
Lissack gained notoriety and financial rewards by participating in and playing the role of whistleblower on yield burning schemes that began coming to light in the 1990's.
Yield burning is a form of financial fraud based on arbitrage resulting from artificially lowering a security's yield by pricing it for more than its fair market value.
The Securities and Exchange Commission was especially interested in the practice of selling open-market Treasuries to issuers for advance refunding escrows.
More recently, Lissack was an advisor to Edelweiss Fund LLC., an entity created by muni advisor Johan Rosenberg to bring whistleblower lawsuits against banks in connection with variable-rate bonds.
According to the book, "The federal tax exemption for municipal bond interest costs the federal government substantially more than state and local governments actually save in borrowing costs."
Lobbying efforts are currently executing a full court press in Congress to remove tax exempt munis from a list of ways to pay for tax cuts desired by the Trump administration.
"Elimination of the tax-exemption would correspondingly raise borrowing costs approximately $823.92 billion, a cost that would be passed onto American residents and amount to a $6,554.67 tax and rate increase for every American household over the next decade," said Leslie Norwood, managing director and associate general counsel, head of municipal securities, Securities Industries and Financial Markets Association.
Lissack's book offers three alternatives to tax-exempt munis, including a federal infrastructure bank, tax credit bonds, and direct subsidy bonds similar to Build America Bonds.
"They should issue taxable (bonds) and there should be a federal infrastructure bank," said Lissack. "They should make an allocation of subsidies out to the states, and then let the states decide how to apply the subsidy."
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The author proposes one way to divvy up the money to the states is to base it on population while also laying out possible wrinkles.
"The simplest formula is population," he said. "You might want to try to do some kind of adjustment for infrastructure needs but that only makes it complicated, and complicated tends not to work. It's clear New York City needs more help than the middle of Iowa."
Allowing smaller issuers to make their own decisions about how and where to allocate funds is typically seen as a major advantage of tax-exempt munis.
"The threat to the municipal exemption is that smaller issuers, smaller school districts, smaller cities, they would lose," said Tom Kozlik, managing director, head of public policy & municipal strategy for Hilltop Securities. "It's not even a matter of cost, they could completely lose access to the capital markets."
Lissack said he's been thinking about writing the book for years and views the current political climate to be fertile ground.
"If I had said this in the Biden administration, I would have been laughed at," said Lissack. "In this administration, throwing things away and starting over seems to be part of the modus operandi."
