Municipal bond exchange traded fund investors could be impacted by the outcome of the presidential election, so they are watching for any potential changes to the federal income-tax exemption status on munis as the government tries to tackle the growing deficit problem.
In outlining their goals to control the country’s heavy deficit, both President Barack Obama and Mitt Romney have proposed eliminating the federal income tax exemption on muni bond interest or limiting it to fewer investors, reports Deborah Levine for MarketWatch. According to LPL Financial, the exclusion on interest costs the government about $49 billion in fiscal 2013. [Tax Debate Puts Dividend, Muni Bond ETFs in Focus]
While the idea has cropped up over the years, the proposal has usually been forgotten as many expected a removal of the tax-exempt status would do more harm than good.
“If you take away that subsidy, state and local governments will see an increase in their cost to do things, shifting the burden to other taxpayers,” Richard Ciccarone, chief research officer at McDonnell Investment Management, said in the article.
Additionally, the tax exempt status benefits a range of investors. According to the Internal Revenue Service, about 51% of all muni-bond-interest income was claimed by investors with less than $200,000 in earnings. [As the Fiscal Cliff Looms, Investors Favor Muni ETFs]