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Why Municipal Bonds Should Remain Tax-Exempt

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January 3, 2012 · Print · Email

In response to proposed legislation that would repeal the tax exemption of municipal bonds, Bernardi Securities, Inc. recently published a study on the potential ramifications of this action.  The Bernardi report, entitled Tax-Exempt Municipal Bonds:  The Case for an Efficient, Low-Cost, Job-Creating Tax Expenditure, highlights concerns related to altering the tax status of municipal bond investments. 

The study examined the 117-year history of the municipal bond market, including an analysis of current market data, as well as research findings from industry and academic experts.

The report also identifies the effects of municipal financings on “the lives and pocketbooks of nearly every U.S. citizen.”

“Local governments and authorities - the entities most in touch with local needs - participate in the municipal bond market to finance important projects for their communities: schools, courts, jails, and water/sewer facilities to name a few.”

“If a public policy goal is to encourage private investment in public purpose capital projects, the tax‐exempt expenditure accomplishes that goal."

“Our observations over nearly three decades worth of municipal market expertise leave us to conclude that the tax‐exempt expenditure is fairly efficient,” said Justin Formas, Director of Municipal Credit Research and co-author of the report.  “If a public policy goal is to encourage private investment in public purpose capital projects, the tax‐exempt expenditure accomplishes that goal.”

Furthermore, these projects, which are often financed at lower costs because of the tax exemption build essential infrastructure and create jobs, says the report.

A repeal of the exemption and its potential risks to these projects prompted the Bernardi study.   The paper’s findings also raised the following concerns:

  • Non-partisan market researchers estimate the revenue gain from the repeal to be 65 percent lower than government estimates that assume (unrealistically) that investors will not adjust their portfolios and reduce their investment in municipal bonds.
  • The repeal could negatively impact jobs and other taxpayer benefits as a result of projects that are financed with tax-exempt bonds.  “Repeal at a time when policymakers are counting on public infrastructure projects to spur job growth seems to diminish such efforts,” the report says.
  • Federal intervention could jeopardize reciprocal immunity and separation of powers. Local authorities could stand to lose their autonomy when it comes to financing and project management.

The complete white paper is available by clicking here.  

About Bernardi Securities, Inc.

Bernardi Securities, Inc., headquartered in Chicago, Illinois, specializes in municipal issues and offers clients a proven, conservative approach to municipal investing. The company’s commitment to research and active portfolio management has consistently produced solid returns for client portfolios - even during the 2008 financial crisis. The firm also acts as an underwriter and has underwritten and marketed over the past few years more than $1 billion in bond issues to help finance public purpose municipal, county, school, park and water/sewer districts throughout the country.

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