Municipal bonds and related exchange traded funds have enticed investors with their tax-exempt status on the income they provide. Now with the so-called fiscal cliff threatening broad tax hikes, some speculate that munis could lose their favorable tax treatment. However, it’s unlikely this would happen.
Congress always seems to revisit the municipal bond tax-exempt status whenever a budget bill deadline comes up but nothing usually comes of it, reports Benjamin Shepherd of Personal Finance for Minyanville. [Best Muni Bond ETFs for Yield]
Shepherd argues that revoking the tax-exempt status would not raise enough revenue to make a dent. Most believe that the removal would only generate an extra $50 billion a year. [Muni Bond ETFs and Tax Uncertainty]
Meanwhile, if the tax-exempt status is thrown out, state and local governments would suffer with higher borrowing costs. Investors are only willing to invest in municipals at their current rates because of the tax advantages. However, if the tax status were revised, investors would require higher rates on the investments to make it worth their while. [Muni Bond ETFs at Record Highs]