Muni bonds’ tax shield looking shinier amid US wealth boom

Muni bonds’ tax shield looking shinier amid US wealth boom
With tax and rate hikes on the horizon, a surge in high-earning American households sets up robust demand for munis.
MAR 21, 2024
By  Bloomberg

Americans are getting richer, setting up the municipal bond market for a bounty of opportunity.

New data from the IRS, analyzed by Western Asset Management Co., show adjusted gross income in the US increased $2.2 trillion in the 2021 tax year — a 17.5 percent surge — making it the highest year-over-year jump in the past two decades. The increase comes as many US households bounce back from a pandemic-induced slump where millions faced job cuts.

“Individuals have gotten wealthier and are falling into higher tax brackets, and these individuals can benefit more from muni incomes than they could in the past,” Western Asset’s Samuel Weitzman said.

The municipal bond market has seen robust demand from investors who have taken advantage of a drop in borrowing costs ahead of the first expected rate cut from the Federal Reserve. The market has been seeing a supply and demand imbalance as a slew of investors are eager to enter the market.

Weitzman wrote in a note on Tuesday said that wealth levels are a key driver of taxing power for state and local governments, and that recent data from the IRS have supported record-high tax collections and favorable municipal credit quality.

Municipal bonds have historically been attractive for high-income earners — the exemption from federal, state and local taxes makes them a catch among the wealthy. Additionally, the asset class often provides a safe haven for high-income individuals when politicians float more levies. An electoral victory for President Joe Biden in November would pave the way for a potential windfall for US state and local-government debt after his call for sweeping tax hikes on corporations and the wealthy.

Biden’s proposals — which include raising the top income tax rate and a 25 percent minimum rate on households worth at least $100 million — stand to make that trade more attractive, boosting demand for debt that states and cities sell to finance infrastructure projects.

States that saw the greatest increases in adjusted gross income were led by Wyoming, with a 27 percent bump. Nevada saw a 26 percent increase and Montana jumped 22 percent.

With no surprise, New York, California and Texas recorded the strongest growth of high-income individuals.

Weitzman said that due to the strong recovery year in 2021, he wouldn’t be surprised if the data moderated in 2022 after seeing such a strong increase.

“As income trends and tax rates move higher, which seem more and more likely at some point given the federal deficits, the tax exemption value that municipal bonds offer will only increase,” said Nisha Patel, managing director at Parametric Portfolio Associates.

Not all commercial real estate is vacant office buildings, says Whitestone REIT CEO

Latest News

LPL building out alts, banking services to chase wirehouse advisors, new CEO says
LPL building out alts, banking services to chase wirehouse advisors, new CEO says

New chief executive Rich Steinmeier replaced Dan Arnold on October 1.

Franklin Templeton CEO vows to "do what's right" amid record outflows
Franklin Templeton CEO vows to "do what's right" amid record outflows

The global firm is navigating a crisis of confidence as an SEC and DOJ probe into its Western Asset Management business sparked a historic $37B exodus.

For asset managers, easy experience is key to winning advisors' businesses
For asset managers, easy experience is key to winning advisors' businesses

Beyond returns, asset managers have to elevate their relationship with digital applications and a multichannel strategy, says JD Power.

Why retaining HNW clients ultimately comes down to one basic thing
Why retaining HNW clients ultimately comes down to one basic thing

New survey finds varied levels of loyalty to advisors by generation.

Stocks drop as investors digest Microsoft, Meta earnings
Stocks drop as investors digest Microsoft, Meta earnings

Busy day for results, key data give markets concerns.

SPONSORED Out with the old and in with the new: a 50% private markets portfolio

A great man died recently, but this did not make headlines. In fact, it barely even made the news. Maybe it’s because many have already mourned the departure of his greatest legacy: the 60/40 portfolio.

SPONSORED Destiny Wealth Partners: RIA Team of the Year shares keys to success

Discover the award-winning strategies behind Destiny Wealth Partners' client-centric approach.