Muni bonds’ tax shield looking shinier amid US wealth boom

investmentnews.com:

Americans are getting richer, setting up the municipal bond market for a bounty of opportunity.

New data from the IRS, analyzed by Western Asset Management Co., show adjusted gross income in the US increased $2.2 trillion in the 2021 tax year — a 17.5 percent surge — making it the highest year-over-year jump in the past two decades. The increase comes as many US households bounce back from a pandemic-induced slump where millions faced job cuts.

“Individuals have gotten wealthier and are falling into higher tax brackets, and these individuals can benefit more from muni incomes than they could in the past,” Western Asset’s Samuel Weitzman said.

The municipal bond market has seen robust demand from investors who have taken advantage of a drop in borrowing costs ahead of the first expected rate cut from the Federal Reserve. The market has been seeing a supply and demand imbalance as a slew of investors are eager to enter the market.

Weitzman wrote in a note on Tuesday said that wealth levels are a key driver of taxing power for state and local governments, and that recent data from the IRS have supported record-high tax collections and favorable municipal credit quality.

Municipal bonds have historically been attractive for high-income earners — the exemption from federal, state and local taxes makes them a catch among the wealthy. Additionally, the asset class often provides a safe haven for high-income individuals when politicians float more levies. An electoral victory for President Joe Biden in November would pave the way for a potential windfall for US state and local-government debt after his call for sweeping tax hikes on corporations and the wealthy.

Biden’s proposals — which include raising the top income tax rate