“By exempting municipal bond interest from federal taxes, the government creates an incentive for investors to buy them, which helps hold down the borrowing costs of the states, cities and other entities that issue them. Curbing the exemption would likely reduce demand for the bonds, pushing those borrowing costs higher,” according to the story. Obama’s proposal would limit the value of many tax deductions and tax breaks—including the tax-exempt status of municipal-bond interest—for singles making more than $200,000 a year and couples making more than $250,000.
“The tax break that U.S. states, cities and counties get on the bonds they issue is in growing jeopardy now that Republicans, in addition to Democrats, are considering limits on the exemption,” Reuters reported Friday.
Jim Colby, portfolio manager and senior municipal strategist at ETF provider Market Vectors, in a telephone interview Friday said this week’s sell-off is based on hearsay in the market about muni tax exemptions. He noted any tax change would hurt muni bond issuers and local governments as well as investors.
Market Vectors High Yield Municipal Index
Full disclosure: Tom Lydon’s clients own HYD.