Municipal bond issuers could be forced to call as much as a collective $150 billion in debt if a plan to limit tax deductions on that bond interest goes forward, according to a report from Bloomberg News.
According to Citigroup Inc., mandatory redemption provisions could be triggered for all bond holders, even if just all are affected by a cap on tax deductions. President Barack Obama’s plan is to limit income tax deductions on earners making more than $250,000 per couple or $200,000 individually could include the tax exemption on municipal bond interest.
“If even a single investor has to pay a single dollar in taxes for bonds which were issued as tax-exempts,” the mandatory redemptions can be triggered for all bondholders, analyst Vikram Rai said in an interview with Bloomberg.
The provisions generally apply to tax-exempt securities sold by governments for companies, hospitals and nonprofits. Private-activity bonds are tax-free only if they finance projects or loans that are considered worthy of the exemption, according to Bloomberg.
The threat to the tax exempt status of muni bonds was averted in the recent fiscal cliff negotiation however observers expect the issue to come up again as Congress takes up tax reform this year. Leaders fear that taxing municipal bond interest would make it more expensive for states and localities to borrow money, thus slowing investment in infrastructure.
Meanwhile, some market watchers have predicted a modest increase in municipal bond rates in 2013, a turnaround from 2012 which saw rates fall to hit record lows in November.