There had been speculation that Congress would curb or eliminate the tax-free status of muni bonds in the fiscal cliff deal, but it didn’t happen.
Still, some analysts think lawmakers will succeed in overhauling the tax code and make serious changes to the tax exemption for income from muni bonds, the Bond Buyer reported Tuesday.
“This does not mean that pressure has disappeared,” said Matt Fabian, managing director with MMA. While munis may not be included in any immediate tax reform proposal this year, spending cut discussions might make the idea of new taxes more attractive, he added.
Mike Nicholas, chief executive officer at Bond Dealers of America, in the Bond Buyer report said the threat to tax exemption is very real right now and future fiscal reform discussions will include raising revenue, but won’t be about tax rates, which were set in the fiscal cliff agreement.
“Instead the discussion will be about limiting exempt deductions and exemptions including muni bonds interest,” Nicholas said in the story, adding that tax reform can take a long time and the prospects of it happening with a highly polarized Congress this year is unlikely.
Higher tax rates that have been approved by Congress have the wealthy seeking muni-bond exchange traded funds and other tax-exempt strategies. Muni bonds have offered investors income exempt from both federal and state taxes.