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Old 12-13-2012, 10:36 AM   #21
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They should only be borrowing for capital projects to begin with so it shouldn't affect significantly affect municipal services currently provided unless they are foolishly borrowing to fund current fund operations.


I take it you're referring to Illinois, land of gov't taxing and spending mismanagement........ We borrow today to have cash for graft and payola tomorrow......
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Old 12-13-2012, 10:37 AM   #22
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Unless tax increases and spending cuts are done equally across the board, every proposal is going to meet with NIMBYism.
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Old 12-13-2012, 10:46 AM   #23
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At this point, to make them taxable MAY (probably) create a situation that would put them in breach of covenants. If that were to happen, the entire bond would be immediately due and payable to the bond holders. So, for existing bonds that are free of all taxes, I do not see that happening. This would create a crisis situation in probably every state/municipality. When you buy or sell bonds (or any other loan) there are covenants that must be strictly followed by the seller/originator, and the buyer does so believing that the seller will abide by these covenants. The interest rate and the taxable or tax free status are key parts of those covenants that serve to either entice or turn away potential buyers.
Hmm. The bonds themselves have covenants or provisions that make them due and payable if the tax rules change and they become subject to federal taxation? I'd never heard that, but I'm sure it's possible. If so, I wonder if the municipalities take out insurance to cover this possibility.

It would seem that muni bond holders are facing the same fate all of us face whenever the rules are changed. Folks who own rental properties lose when Congress decides every American should qualify for a mortgage.

Anyway, I'd bet any change to the treatment of muni interest will be phased in over several years, or be subject to some sort of cap. Their prices would still plummet, but holders would have a few years to sell them, maybe to investors who could still make use of them below any cap.

Putting the issue of fairness to current bondholders aside for the moment--Should federal taxpayers be subsidizing the creation of municipal debt?

I am surprised to hear this proposal bandied about, as municipalities and investors will be screaming.
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Old 12-13-2012, 10:52 AM   #24
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Let's not label munis as a haven for the ultra rich only.
I've been using MUB happily as a subsitute for lame MM's and CD's. By doing so I'm exempting a fair amount of income from taxes in my world, which features a lack of meaningful traditional deductions and a high (er) tax rate than I previously enjoyed.
Like any fluctuating investment, you've got to be careful picking an entry point into MUB, and of course, if the guvment tinkers with its status--it's game over.
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Old 12-13-2012, 11:19 AM   #25
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Just thought I would throw in the proposal...

"The plan would curb the value of the tax break to the benefit it affords to earners in the 28 percent bracket. The exemption effectively provides a 35 percent tax break for top earners because thatís what they pay on other income. For couples earning less than $250,000, or individuals below $200,000 for single taxpayers, there would be no change, said Meg Reilly, a spokeswoman for the White House Office of Management and Budget."



So, from what I am reading, you still would get a tax break, but only up to 28% rate... so, if you are in the 35% tax rate you will pay 7% tax on the interest.....
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Old 12-13-2012, 11:23 AM   #26
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Just thought I would throw in the proposal...

"The plan would curb the value of the tax break to the benefit it affords to earners in the 28 percent bracket. The exemption effectively provides a 35 percent tax break for top earners because thatís what they pay on other income. For couples earning less than $250,000, or individuals below $200,000 for single taxpayers, there would be no change, said Meg Reilly, a spokeswoman for the White House Office of Management and Budget."



So, from what I am reading, you still would get a tax break, but only up to 28% rate... so, if you are in the 35% tax rate you will pay 7% tax on the interest.....
That's my understanding also.
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Old 12-13-2012, 11:48 AM   #27
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This is a tough issue to discuss. Over the years muni bonds haven't returned as much as the stock market....they have yielded an after tax gain higher than bonds, overall, for high income individuals. But they do save cities and states money and all people, middle and high income have enjoyed lower taxes and more community services because of them. Actually, eliminating muni bonds increases local expenses with the higher taxes going to the federal government. I'm not sure we want to "screw" our cities for Washington.

Another concern is how it is done. There are many ways to do it, removing tax exempt status from current muni bonds, lowering the saving from current federal taxes to 28% or eliminating exempt status from future local bonds.

A great deal of retired middle income folks own muni bonds. I have some but I'm not as rich as Suze Orman. I just like the idea of NOT having to worry about taxes on a part of my net worth and I do gain more income from muni bonds than I would on bank CD's or government bonds. They don't make me rich, however, and I would hate to see charities, muni bond holders and others lose in the tax changes. Muni holders need their income, charities need contributions and we shouldn't hurt so many that didn't cause our problems. I don't mind paying a little more in taxes.....none of us should.....and, don't forget we're not really talking about cutting govermnet spending, we're only talking about cutting the rate of increase of government spending.

I don't want to sould political............I'm not! I'm in the middle and think that both the far left and the far right should get their heads out of their butts and do what's right for all Americans.

Everyone.........have a great day. I have my health, my family and enough money to pay all my expenses..........I'm really lucky and wish the same for all.
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Old 12-13-2012, 01:36 PM   #28
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. . . all people, middle and high income have enjoyed lower taxes and more community services because of them. Actually, eliminating muni bonds increases local expenses with the higher taxes going to the federal government.
Reducing the tax breaks for muni bonds would make these public entities compete for investment dollars on a more level playing field with private bond issuers (companies that create wealth, provide employment, etc). It's not clear that a new football stadium is a more productive use of funds than a new factory.

Tax breaks for municipal bonds is a subsidy for communities that borrow money. Communities that do a better job of managing their fiscal business (i.e. they pay for operations using taxes rather than issuing a new bond to pay salaries, pensions, etc) get less of an advantage than those which borrow more.
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Old 12-13-2012, 01:48 PM   #29
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No, in fact I favor it because it would make income taxes more progressive since the wealthy are the principal beneficiaries of this tax benefit. Making muni interest tax-free was probably not a great idea to begin with and it would make the code simpler once it is fully implemented.
I'd argue the states & local governmental agencies are the principal beneficiaries. Don't know why it isn't a great idea. Simplicity of the code eliminates pols ability to dole out tax perks. Net, ain't gonna happen.

How's the post count going?
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Old 12-13-2012, 01:51 PM   #30
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While it would constrain municipalities in the future as you suggest, that may not be bad. They should only be borrowing for capital projects to begin with so it shouldn't affect significantly affect municipal services currently provided unless they are foolishly borrowing to fund current fund operations.
Why does this concern for foolish borrowing to fund current operations apply to the states but not the Fed Gov? They at least theoretically need to balance their budgets. Thanks.
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Old 12-13-2012, 02:02 PM   #31
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As far as those guys paying zero taxes, isn't that what the AMT is for? I thought it captured muni income after some point?

-ERD50
No it does not - the buyer just has to be careful which muni bonds. There are "AMT-free" muni bond funds that are careful not to buy muni bonds that incur AMT taxable income. FTABX would be an example.
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Old 12-13-2012, 02:05 PM   #32
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I don't want to sould political............I'm not! I'm in the middle and think that both the far left and the far right should get their heads out of their butts and do what's right for all Americans.
Hear that all the time, but of course the issue is what's right. Many different views & hence the problems. I'll bet no matter what Washington does, five random people here won't agree it was right. And if you choose to lay out here what is right by you, it will be immeidately criticized.
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Old 12-13-2012, 03:11 PM   #33
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I'd argue the states & local governmental agencies are the principal beneficiaries. Don't know why it isn't a great idea. Simplicity of the code eliminates pols ability to dole out tax perks. Net, ain't gonna happen.

How's the post count going?
Good point in that the tax advantage isn't huge given differences in taxable/tax-free interest rates absorb a lot of the benefit.

I'm pleasantly surprised the thread is still open. Perhaps there is hope after all.
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Old 12-13-2012, 03:13 PM   #34
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Why does this concern for foolish borrowing to fund current operations apply to the states but not the Fed Gov? They at least theoretically need to balance their budgets. Thanks.
Where did I infer that I wouldn't apply the same concern to the federal givernment?
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Old 12-13-2012, 03:30 PM   #35
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I wouldn't be opposed to Muni's being taxable going forward (assuming current bonds remain tax exempt). I also don't have a major problem with dividends and capital gains being taxed as ordinary income or cutting way back (or eliminating) itemized deductions. I think everything needs to be on the table should our elected officials ever get the notion of actually doing something about tax reform/deficit.

I should note that everything I just said I didn't have a problem with will cost me more in taxes and spending cuts would have to be a BIG part of the solution too.
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Old 12-13-2012, 10:09 PM   #36
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Where did I infer that I wouldn't apply the same concern to the federal givernment?
Just lack of mentioning a much bigger elephant on the table.
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Old 12-13-2012, 10:12 PM   #37
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I wouldn't be opposed to Muni's being taxable going forward (assuming current bonds remain tax exempt). I also don't have a major problem with dividends and capital gains being taxed as ordinary income or cutting way back (or eliminating) itemized deductions. I think everything needs to be on the table should our elected officials ever get the notion of actually doing something about tax reform/deficit.

I should note that everything I just said I didn't have a problem with will cost me more in taxes and spending cuts would have to be a BIG part of the solution too.
I think corporate profits should be taxed once either to the company or to the dividends' recievers. As is, taxing both hides the true rate to me. People ignore that companies pay up to 35% tax on profits before they ever get their dividends. Net to me, total combined rates shouldn't exceed max personal rate.
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Old 12-13-2012, 10:39 PM   #38
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If the interests from the Muni bonds become taxable, market force will kick in and the cities will have to pay a higher interest in order to get people to buy their bonds. The taxpayers who live in those cities will end up with higher tax bills.
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Old 12-13-2012, 10:50 PM   #39
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If the interests from the Muni bonds become taxable, market force will kick in and the cities will have to pay a higher interest in order to get people to buy their bonds. The taxpayers who live in those cities will end up with higher tax bills.
Yes, they will. And if the cities/counties/water and sewer districts, etc have shaky finances then investors will demand a higher interest rate and the local taxpayers will end up with still higher tax bills.

One of the reasons we have municipalities building stadiums and other things that should be privately funded is because cities can borrow at a lower rate (due to the federal tax break).
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Old 12-13-2012, 10:51 PM   #40
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From reading your posts, it sounds like you have to be ultra rich to benefit from muni investing.

I pay fed. tax on my pension, later I am sure we will be paying tax on SS, and when I start collecting RMD, I'll be paying taxes on that.

Don't you think it would be nice to have some tax free income later in life, especially if inflation goes up?

I've been putting off purchasing any tax free bonds until Mr. Obama and Mr. Boehner make their minds up about the taxes.
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