The main risk to tax-exempt bonds is a potential 28% cap on the tax benefit. Under the aforementioned scenarios, taking into account the improved government fiscal conditions, any risk to tax-exempt status of municipal bonds is reduced.
If anything were to happen related to taxes, corporate tax reform and tax inversions would likely take center stage. It is possible (though unlikely) that to pay for corporate tax reform, Congress may look for additional revenue by capping the tax exemption on municipal debt interest payments. It is our view that political inertia will likely prevail (in other words very little will get done in Washington) despite a backdrop of modestly improving economic conditions, which means interest rates will likely move modestly higher.
Source: NPR, The Bond Buyer, The Economist & Joni Ernst for U.S. Senate
This article was written by SNW Asset Management’s Samuel V. Hecker.