WASHINGTON — The tax-exemption for the interest paid on all municipal bonds will cost the federal government an estimated $38.7 billion in fiscal 2011, according to President Obama’s proposed budget for that fiscal year, which begins Oct. 1.

The $38.7 billion represents a 37.76% increase from the $28.1 billion of revenue losses projected from tax-exempt interest for this fiscal year and is 2.46% higher than the $37.78 billion of losses that had been projected for fiscal 2011 by the fiscal 2010 budget released last May.

The figures suggest a big bump in the revenue losses from tax-exempt bonds in fiscal 2011 from the current year.

The budget documents do not specify the assumptions used in the revenue loss estimates.

The administration could be assuming that state and local governments will turn to bonds for deficit financing in the coming fiscal year, said Michael Decker, managing director and co-head of the Securities Industry and Financial Markets Association’s municipal securities division, noting the bump up from fiscal 2010 to 2011.

The Obama administration is forecasting that the revenue losses from public purpose bonds in fiscal 2011 will rise to $28.66 billion, a 3.02% gain from the $27.82 billion that had been estimated for this fiscal year in last year’s proposed budget.

Private-activity bonds would result in revenue losses of $10.05 billion, a 0.9% increase from the $9.96 billion that had been projected for fiscal 2011 last year.

Revenue losses would rise in every category of private-activity bonds in fiscal 2011 from fiscal 2010, the administration is projecting.

Market participants yesterday were poring over the budget documents for clues as to how the Treasury Department envisions the popular taxable, direct-subsidy Build America Bond program affecting tax-exempt bonds.

But the budget documents provide no specific assumptions on that.

The estimates of revenue losses are based on tax law enacted as of Dec. 31, 2009, according to the budget documents, and would therefore take into account the easing of tax law restrictions for some municipal bond programs and the creation of the BAB and Recovery Zone Bond programs under the American Recovery and Reinvestment Act, which was enacted last February.

John Hallacy, managing director and head of municipal research at Bank of America Merrill Lynch, noted that the budget documents show revenue losses from public purpose debt and private-activity bond debt ascending over time.

“They’re kind of bullish on tax-exempts,” he said.

 The Obama budget projects that interest rates will rise as financial concerns are alleviated and the economy recovers from the recession. The 91-day Treasury rate is projected to reach 4.1% and the 10-year rate 5.3% by 2013.

The administration projects economic growth of about 4.25% from 2011 through 2013. In addition, the unemployment rate will decline to about 7.0% by 2013, according to budget documents.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.