Interest payments on municipal bonds are tax-exempt from federal income tax for the most part.  There have been attacks over this in the past, all of which have failed to go anywhere.  Imagine how many states and municipalities (and their agencies) would go bankrupt if there borrowing rates ratcheted higher… Still, in the research notes this afternoon we see that Janney Capital Markets’ Fixed Income Weekly report is challenging the notion of the tax-free status for muni’s.

Again, this challenge has arisen before.  It has always failed.  Janney pointed out that this tax-exempt status was brought up in 2010 as a part of Simpson-Bowles

Janney’s Alan Schankel was quoted, “We believe that curtailment or elimination of the tax exemption is a strong possibility in 2013 and beyond, as a new congress (hopefully) attacks the fiscal cliff problem and the ever growing federal deficit.” 

The argument is not an all or none situation according to Janney:

• “Smaller and core municipal borrowers would be most hurt with higher borrowing costs, so, along with their core public purpose mission, they have a stronger argument for retention of the exemption. More peripheral borrowers such as higher education and healthcare organizations have a weaker justification for the tax exemption.”

We would caution yet again that attacks to limit, alter, or kill the tax-free status of muni bonds is not a new notion.  That being said, all efforts on this front have failed over and over.

JON C. OGG

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