Wednesday, September 14, 2011

Taxing Muni Bonds

Buried within the Obama administration's jobs bill was a proposed change to the tax treatment for municipal bondholders. If the bill were to pass as originally presented - which doesn't seem very likely - people in the top tax brackets would not be able to deduct quite as much interest from tax-exempt muni bonds.

It's important to understand what this proposal would and wouldn't do. It applies only to people in the top tax bracket, which means families with more than $250,000 in income, or singles with more than $200,000. It would cut back the tax advantage for tax-exempt munis from 35 percent to 28 percent. It would also have no effect on state taxation levels.

The idea is that the reduction of this tax break would help pay for other job-creating activities in the president's bill. Last year's deficit reduction panel had already made a similar proposal. But in addition to raising taxes, it could also make it even more difficult for state and local governments to borrow money and finance their projects; those state and local governments have cut more than 600,000 jobs since 2008.

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