Taxing Municipal Bonds or Removing Tax Breaks Could Be a Mistake

During the 2012 End of the World so-called Fiscal Cliff of our Federal Government there seems to be quite a bit of suggestions from the Obama Administration and President Obama himself about curtailing tax cuts for the wealthy when people of means invest in Municipal Bonds. Does this make sense? Should we be considering this? Can we do something like this during a time when Muni Bonds are sketchy in many places and municipalities are having trouble with their budgets? Let’s talk.

You see, there was an interesting article in the Wall Street Journal on December 12, 2012 titled; “Tax Breaks on Muni Bonds Draw Scrutiny” by John D McKinnon and Andrew Ackerman which noted that some $30 billion in interest earnings from investors of Municipal Bonds are missed by the Federal Government.

However, if we remove this deduction now, then in essence the Federal Government is hurting our communities, cities, and municipal budgets. That hurts infrastructure upgrades such as sewer treatment plants, flood control run-off ditches, school projects, bridges, roadways, parks, libraries, etc. all so the Federal Government can have more money? Why, the Federal Government wastes so much money “trillions of dollars” a year in fact.

Since the Federal Government cannot live within its means, it is willing to perhaps cause a collapse of the Muni Bond market. Indeed, something like this could cause a flight from bonds, a cascading challenge for so many cities. With fewer investors, all within what some consider a bond bubble we could be in for big trouble.

Do we have to be worried that a politician will make a horrible mistake, or inadvertently destroy all the towns, communities, and cities in America over this? It’s not that the Muni Bond market hasn’t gotten a little at of control in the past, or created a bubble worthy of being highly scrutinized. That is a real problem, as Meredith Whitman has discussed, and I’d say she’s right, the municipal bond market is not out of the woods yet.

In my professional opinion it is irresponsible to be talking about removing the tax breaks for Muni bonds at this point, as it would collapse the bond market. We just don’t need that level of uncertainty for investors. It’s not good for our country, our economy, or for all those communities.

President Obama has suggested that before he became president he was a “Community Organizer” and in that regard, I’d like to say that there would be nothing worse for the communities around the country then to pull something like that, and it’s not even funny to entertain the idea. Please consider all this and think on it.

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