Question

What do you think has been the impact of President Clinton and President Obama tax policy on the market for municipal securities.

Answer 1

President Obama's plan to restrict the tax exemption on municipal bonds to 28 per cent remains alive. That means an investor with a top federal marginal tax rate of 43.4 percent (47.4 percent including the 4 percent surcharge) would pay a 15.4 percent tax on their municipal income (19.4 percent including the surcharge). Trump, although in his initial proposal he did not provide specifics, had previously stated his desire to limit municipal tax exemption to 10 percent, leaving a federal tax of 15 percent on municipal income. Nevertheless, since the municipal tax exemption is not even stated in his subsequent proposal, some political observers suggest the exemption could be at risk.

Capping or eliminating the municipal tax exemption or reducing the top marginal tax rate would cause municipal yields to shift higher compared with taxable bonds; at the same time, the value of the bonds would fall, initially The longer the maturity, the greater the initial price impact. The combination of strong demand in the face of weak supply has been a boon for municipal bond prices over the last several years. Five of the last six years have indeed seen net negative issuance of municipal bonds. That might seem surprising given historically low interest rates and the corresponding increase in issuance of corporate bonds.