Tax breaks for investments in municipal bonds won't be touched by the special congressional committee charged with putting together a deficit reduction package by Thanksgiving, according to a House Republican freshman.
The bipartisan, bicameral 12-member panel probably won't get the seven votes that it needs to trim the tax exemption for investing in state and local government projects, said Rep. Steve Stivers, R-Ohio.
President Barack Obama is hoping that the committee will take up his proposal to cap at 28% tax deductions and exclusions for individuals who earn more than $200,000 and families making more than $250,000 annually.
The muni bond tax break is included in that package, which is part of his jobs plan. The tax reform provisions would raise $1.5 trillion and contribute to $3.2 trillion in deficit reduction over the next decade.
Mr. Stivers, however, doesn't expect his Republican colleagues to go along with the muni bond tax changes. There are six Republicans and six Democrats on the so-called supercommittee.
“It changes the rules in the middle of the game for a lot of [muni bond investors]; it's a tax increase,” Mr. Stivers said in a speech before the Securities Industry and Financial Markets Association's Municipal Bond Summit last Tuesday.
In an interview afterward, he said that high-income individuals make up most of the muni bond market.
Forcing them to take a “haircut” on their returns would cause them to demand higher rates from governments, increasing the costs of infrastructure projects, Mr. Stivers said.
“If I was guessing today, I would say that it's not something that will be part of the final report,” said Mr. Stivers, a member of the House Financial Services Committee.
He could envision muni bond changes in broader tax reform when it is a part of a larger policy chess set of movable pieces.
Mr. Stivers warned the SIFMA audience, however, not to be complacent now that the idea is on the table with the supercommittee.
“I would tell people: Get engaged. Make your case to policymakers and make sure they understand why you think this could be a bad thing for the municipal marketplace and local governments,” he said.
Mr. Obama's including muni bond taxation in his job package provided a sharp poke to the industry, even though no one expects the proposal to get through Congress intact.
George Friedlander, managing director and senior muni bond strategist at Citigroup Inc., doesn't expect the president's jobs package to become law or for major tax reform to occur until 2013.
But Mr. Obama's tax proposal has the industry on its toes.
“The Obama administration did us something of a favor,” Mr. Friedlander said at the SIFMA conference.
Mr. Stivers also doubts that the supercommittee can overhaul the tax code by its Thanksgiving deadline.
“Meaningful tax reform can't happen before 2013,” he said. “We need the time to get it done.”
mschoeff@investmentnews.com
