In September, Montana senator, Max Baucus, requested the Congressional Committee on Taxation to recommend revenue generating ideas. The Committee’s report, which was released on October 11, included a repeal of the interest exclusion from municipals, calling the interest “tax expenditure.”
In response, a coalition of municipal market professionals is forming an alliance called “Municipal Bonds for America.” It will be dedicated to protecting the tax-exempt status of municipal bonds. Its premise — repealing the interest exclusion of municipal bonds will lead to higher financing costs for governments and, consequently, local taxpayers — is a burden that logically neither presidential candidate would want to advocate.
I believe this debate will likely be waged across the political aisle as a matter of “privilege” versus “practicality.” It must be noted that both candidates have made mention of the Committee’s proposal; whether it actually becomes a focal point leading up to the election will likely depend upon how forcefully this “point-counterpoint” debate is waged.
In my opinion, the practical aspect of this debate rests on the reality that state and local governments must have access to capital if they are truly to recover and rebound from the recession. Municipals generally have long been an effective vehicle for that access, and with rates remaining near historically low levels, I see no better financing alternative.
Market Vectors High Yield Municipal Index ETF (NYSEArca: HYD)
James Colby is a portfolio manager and senior municipal strategist at Market Vectors ETFs.