A particular saying I used to hear around the office of my first job was, "let's throw it against the wall and see if it sticks", comparing the testing of new ideas to the testing of properly cooked spaghetti. I was reminded of this analogy as I read several recent articles with headlines like "Obama Seeks to Curb Muni Bond Tax Breaks, Again."
Sparing you the minutiae, the recent Obama 2013 budget plan repeats much of what was originally in the hands of the "Super Committee" last fall. The committee was charged with repairing the deficit, and its guidelines included initiatives to reduce, if not completely repeal, the tax benefits currently offered by municipal bonds.
It strikes me as especially desperate and lacking in constructive thinking to, in this instance, steal from Peter in order to pay Paul. By imposing a tax on income derived from tax-free bonds, Obama's plan would instantly devalue portfolios holding nearly a half trillion dollars in open-end mutual funds. Furthermore, the cost of capital would increase for state and local municipalities that depend on this market to finance roads, bridges, schools and hospitals at low cost to their taxpayers.
On top of this is Obama's desire to revive the highly successful Build America Bond program, at a subsidy rate lower than the original rate in the Stimulus Act of 2009 [a.k.a., The American Recovery and Reinvestment Act of 2009]. Municipals would, therefore, become an even more complex asset class.
If this sounds confusing, it is. In the context of an election year, I believe there is little likelihood of Obama's proposed 2013 budget passing. However, by extension of the analogy, if you throw enough spaghetti against the wall SOME of it is going to stick. And it will be messy. Will the taxpayers have to foot the bill to have the White House walls cleaned?
James Colby is the senior municipal strategist, fixed Income at Van Eck Global. To read more from Colby, click here
