What happens if munis lose their tax exemption? Advisors weigh in.
Tax-free municipal bonds have traditionally been the cornerstones of high-net-worth investor portfolios.
So what happens if those tax-free benefits go away?
Wells Fargo & Co.’s head municipal bond strategist Vikram Rai said this week the tax-exempt status of bonds sold by state and local governments could be in jeopardy no matter which candidate wins the Presidential election in November. Rai stated that the potentially drastic measure would be made to combat the national debt which now sits at $34.95 trillion – and climbing.
Municipal bonds, which pay interest to investors that’s exempt from income taxes, have been viewed as a vehicle to raise revenue for the Federal government before. The Obama administration, for instance, proposed limiting the interest from municipal bonds that top earners can exclude from their taxable income, but the plan was never put into action.
“The possibility of such proposals being put forward again in the future in light of a worsening fiscal picture cannot be ignored as deficit reduction and/or tax reform moves forward,” according to Rai.
Rai added that at present there is currently “no threat whatsoever” to the tax exemption of outstanding bonds. Nevertheless, Christopher Davis, partner at Hudson Value Partners, says it is not inconceivable for such a plan to be enacted considering the country’s dire financial outlook.
“Altering the tax status of municipal bonds would be an out of the box way for either party to find revenue and likely be politically palatable as it primarily hits higher earners,” said Davis.
Added Davis: “Losing their tax status would make us much more inclined to buy corporate bonds over municipals given their better liquidity and greater transparency in public company
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