The tax-free break on municipal bonds under scrutiny….again

Eliminating the tax-favored treatment of municipal bonds is again being considered by Congress. The Wall Street Journal reports it’s been proposed 125 times since 1918. This time the odds are higher that the tax break on interest income is eliminated given the urgency of reducing the debt. According to one analyst getting rid of the tax break on munis may beneficial to the market since, “many public-private partnerships are prohibited by the private activity bond restrictions that come with tax-exempt bonds.”

Some believe that a substitute needs to be offered to state and local governments. One proposal is to revive the Build American Bonds (BABs) program in which the federal government subsidizes the issuer paying 35 percent of interest costs. Investors  get a higher but taxable yield on bonds. BABs have a constituency among infrastructure groups and mayors and a majority of mayor’s want BABs included in the upcoming highway bill.