* Cuts for families with incomes of more than $250,000
* Build America Bonds revival suggested again
* Budget would allow bigger pool of debt to be refunded
By Lisa Lambert
WASHINGTON, Feb 13 U.S.
President Barack Obama on Monday proposed
limiting tax breaks given to high-income earners on the interest
paid by municipal bonds, a change that could rock the $3.7
trillion market if approved.
In his fiscal 2013 budget, Obama reiterated his
desire to cut tax breaks for families with incomes over
$250,000, saying they should only be allowed to reduce their tax
liabilities to 28 percent of income from the current 35 percent.
"It is very unfortunate that investors who bought tax-exempt
muni bonds in good faith under the premise that they would be
tax-exempt would be subject to at least a 7 percent tax under
the proposed budget," said Chris Mier, a managing director at
Loop Capital Markets.
Among the list of breaks, Obama included tax-exempt
interest, the payments made by U.S. municipal bonds. Obama made
a similar suggestion in legislation in September, and many of
his proposals that could impact the municipal bond market have
"The budget contains what looks like a number of recycled
muni provisions," said Chris Mauro, director of municipal bond
research at RBC Capital Markets. "There's no expectation that
any of this gets passed in an election year. At best, it keeps
the tax reform conversation going."
Individual investors who buy municipal bonds frequently have
high incomes, and one of the debt's chief selling points is that
they can exempt the interest from their federal income taxes.
The long-standing practice allows states, local governments and
authorities to offer lower interest rates on tax-exempt debt
than they would on taxable bonds.
Investors buying a 10-year muni bond rated AA would need
more than 80 basis points more in yield to get the same taxable
equivalent as a 10-year AA-rated corporate bond using a top tax
rate of 28 percent, said Richard Ciccarone, a managing director
and chief research officer at McDonnell Investment Management.
"This could raise borrowing costs (for municipal issuers)
because you have to make up for the tax equivalent cost,"
By the middle of the day, the municipal bond market largely
shrugged off the proposal, with many noting the budget must wend
its way through a politically fractured Congress.
"I think everybody assumes it's dead on arrival," said
Parker Colvin, managing director at Stone & Youngberg in San
In the budget, Obama also proposed "an expanded and
permanent extension" of the taxable Build America Bonds program
created in the 2009 economic stimulus plan. But the Bond Dealers
of America group said cities and states still "need a strong
The budget advocated allowing a wider universe of bonds,
including BABs, to be refunded, as well.
"State and local bond programs have varied in the extent to
which they expressly allow or treat refinancings," according to
budget documents. Granting "a general authorization for
refundings of state and local bonds not currently covered by
specific refunding authority would promote greater uniformity,
tax certainty, and borrowing cost savings."
Under Obama's plan, issuers would have only two restrictions
on refunding bonds. They could not issue refinancing bonds with
greater principal amounts than the original bonds, and the new
bonds could not have average maturities greater than the debt
This will be the third year in a row Obama has tried to make
the BABs program, which expired in December 2010, permanent.
Republicans and Tea Party conservatives criticized the
program, which paid issuers a federal rebate equal to 35 percent
of interest costs, as rewarding profligate states while
funneling taxpayer dollars to Wall Street underwriters. Over the
last year, hopes for a revival of the program have all but died.
Obama proposed operating the BABs program for two years with
a subsidy of 30 percent and then "extend it permanently
thereafter at a subsidy rate of 28 percent."
Cities, states, schools and other issuers sold $181.5
billion of BABs from April 2009 through the end of December
2010, according to Thomson Reuters data.
"(I am) not sure how likely it is that any program related
to the Recovery Act, no matter how good it is or was, is going
to be re-instituted," said Thomas Kozlik, director and municipal
credit analyst at Janney Capital Markets.
MOST STATE, LOCAL OUTLAYS FOR HEALTHCARE
Currently, 28 states owe more than $37 billion to the
federal government for unemployment benefit loans and businesses
in states with outstanding balances are facing a federal tax
hike. The budget proposed suspending interest on the loans while
postponing the tax hike for two years.
Obama's budget would "also raise the minimum level of wages
subject to unemployment taxes in 2015," it said. "The higher
wage base will be offset by lower tax rates to avoid a federal
As the sweeping healthcare overhaul comes on-line, fewer
people will lack health insurance, according to the budget.
Obama would cut $18.1 billion through 2020 in "Disportionate
Share Hospital" payments intended to support hospitals that
treat low-income and uninsured patients.
Altogether, the budget "provides $623.7 billion in outlays
for state and local governments in 2013, an increase of $20.2
billion from 2012."
Nearly half would go to healthcare, according to budget
documents, with 17 percent for income security programs, 15
percent for education and social services, and 13 percent for
While Obama would keep the Community Development Block
Grants used to combat blight and other urban problems, he would
put only $3 billion into the program. The grants were nearly
eliminated under his predecessor, President George W. Bush, and
when he took office Obama pressed to take them back up to a
little more than $4 billion.