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Proposed law may change muni bond taxes
Old 09-10-2006, 02:34 PM   #1
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Proposed law may change muni bond taxes

Jim Jordan's column writes -

"Tax collectors in at least 34 states are watching a Kentucky court case that could dramatically change the way municipal bond income is taxed.

One national tax expert says the so-called Davis case could be nothing less than "earth-shattering."

Kentucky's two highest courts have declared the state's current bond tax policy unconstitutional, and the case is headed to the U.S. Supreme Court. If that court agrees, all municipal bonds might have to be taxed equally or not at all.

Thirty-four to 41 states, including Kentucky, do not tax income from their own municipal bonds that are held by state residents. But they require their residents to pay taxes on income from bonds issued by other states."

This case is going to the Supreme Court on Aug 17th. Personally, I don't think it will pass. What is the incentive of buying muni's other than taxes? Will our kind gestures continue to fund the state gov's projects if the bonds become taxable?

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Re: Proposed law may change muni bond taxes
Old 09-10-2006, 03:24 PM   #2
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Re: Proposed law may change muni bond taxes

First... it does not affect me at all.... Texas does not have income tax.... this is someone else's issue..

But a few questions that come up....

Why would the Supreme Court care at all what Kentucky does with their state income tax?? I would think that they would just ignore the decision as it is a state matter... I did not see that this was in a federal court, but a state court..

If Kentucky loses.. then they can decide not to tax all munis... but, that is something that very few politicians can do.. not tax something...

They can pass a tax on 'investment' income over a certain amount.. this would be the 'rich' who own these kind of bonds but would still give the appearance of a tax free bond..

Sorry... but I just do not see it as 'earth shattering'..
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Re: Proposed law may change muni bond taxes
Old 09-10-2006, 06:52 PM   #3
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Re: Proposed law may change muni bond taxes

I agree with TexasProud that this is anything but "earth shattering". The issue seems to be over state taxes only. Muni's would still be exempt from Federal taxes, which are much higher than rates in all 50 states. As TexasProud points out, states could keep their own tax exemption by exempting all muni bond income . . . whether or not they would do this depends on whether the tax revenue forgone as a result of exempting out of state interest would be greater than the increased financing costs if their own bonds were taxable. The end result could be that ALL muni bond interest is tax free regardless of whether you are a resident of the issuer.

In any event, the difference between having state interest taxable versus non-taxable in the most extreme case (NYC 10.498% marginal rate) seems to be worth about 55 basis points in bond yield . . . not great but also not exactly earth shattering.
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