WASHINGTON — The $447 billion American Jobs Act of 2011 that President Obama sent Congress late Monday would bar wealthy investors from using tax-exempt bond interest and other tax exclusions, expenditures and deductions to reduce their income tax rates below 28% — a proposal that would have significant adverse impacts on the municipal bond market.

The restriction would apply to single taxpayers with incomes of $200,000 or greater and married couples with incomes of $250,000 or greater. It would apply to taxable years beginning on or after Jan. 1, 2013.

“It would be dramatic for municipal bond demand,” said Matt Fabian, a managing director of Municipal Market Advisors. “It would mean higher income investors would pay less for municipal bonds and demand higher interest rates. Issuers’ borrowing costs would rise dramatically.”

Internal Revenue Service data from 2009 shows that 58% of all of the tax-exempt interest reported to the IRS was from individuals with incomes of $200,000 or higher, Fabian said.

Dealer groups agreed the proposal would hurt the muni bond market.

This proposal would significantly reduce demand for tax-exempt bonds for a large portion of the tax-exempt investor base.  “The result would be higher borrowing costs for state and local governments and less investment in job-producing infrastructure projects,” said Michael Decker, co-head of the Securities Industry and Financial Markets Association’s municipal bond division.

Mike Nicholas, CEO of the Bond Dealers of America, said BDA “is strongly opposed to eliminating the tax exemption on municipal securities for over 1/3 of the market for municipals and in essence driving up the cost of financing vital projects for municipal bond issuers and raising the costs for individual tax payers nationwide.” 

Charles Samuels, a partner at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., said it is ironic that Obama is trying to pay for his legislation, which focuses on providing federal assistance for infrastructure with a proposal that will hurt tax-exempt bonds, which states and local governments use to finance infrastructure projects.

“There’s going to be less value for tax-exempt bonds and more burden on states, local governments and charities even though they’re the ones we’re counting on to provide infrastructure and services,” he said.

The 155-page bill would provide $27 billion for highway repair, construction and other transportation projects, $2 billion for airport development grants, $4 billion for developing high speed rail corridors and intercity passenger rail, and $5 billion of grants for surface transportation modes that would have a significant impact on the nation, a region or metropolitan area.

It also would create the American Infrastructure Financing Authority — a wholly owned government corporation that would provide direct loans and loan guarantees to facilitate investment in economically-viable infrastructure projects of regional or national significance. The legislation would authorize and appropriate $10 billion for the AIFA. But it would limit amount of loans and loan guarantees to $10 billion in each of the first two fiscal years, $20 billion in each of the second through ninth years and $50 billion in each year thereafter. These projects could be highways, bridges, ports, passenger rail, dams, solid waste disposal system, levees, and energy facilities.

The president would appoint, with the advice and consent of the Senate, a CEO to the AIFA for a term of six years. The AIFA’s board would consist of seven voting members who would also be appointed by the President with the advice and consent of the Senate and serve four-year terms. No more than four of them could be from any one political party.

The legislation also would exempt from the alternative minimum tax all private activity bonds issued in 2011 and 2012. The American Recovery and Reinvestment Act enacted in February 2009 exempted tax-exempt bonds issued in 2009 and 2010, but the provision expired on Dec. 31.

In addition, it would provide funds for school modernization that could be used to pay the debt service on tax-exempt bonds issued for school modernization, renovation, or repair interest, among other things.

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