Municipal-Bond Tax-Exemption Faces ‘Real Threat’ in Cost Drive, Says Kraft

The tax-exemption on interest paid by state and local bonds faces a “real threat” from the congressional supercommittee charged with shrinking the U.S. deficit, said John L. Kraft, a municipal-bond attorney.

The exemption will be a target for the panel as it seeks to find $1.5 trillion of spending cuts or revenue increases over 10 years, said Kraft, a partner with Lomurro, Davison, Eastman & Munoz Inc. in Freehold, New Jersey.

“Tax exemption is not a tax preference for the rich but an opportunity for states to carry out their capital projects in the most cost-effective way,” Kraft said today at the State and Municipal Finance Conference hosted by Bloomberg Link in New York. “Do away with the exemption and you’re imposing on the citizens a tremendous cost.”

Federal lawmakers won’t change the exemption for municipal securities in the next 12 months, according to a survey of municipal bond professionals.

President Barack Obama and Congress over the next year will leave the tax exemption for municipal securities untouched, about 71 percent of 102 respondents said today in a survey conducted at the conference. An additional 27 percent said lawmakers would limit the tax exemption and about 2 percent said Washington would end it.

The exemption lowers the cost of borrowing for state and local governments because investors in the $2.9 trillion municipal market accept lower interest rates if they don’t face taxes of bond payments.

Borrowers should lobby Congress to maintain the exemption, said Lynnette Hotchkiss, executive director of the Municipal Securities Rulemaking Board, which regulates the market.

If the supercommittee, which began work Sept. 8, fails to meet a Nov. 23 deadline for its suggestions, $1.2 trillion of automatic cuts will be made, about half from the military.

To contact the reporters on this story: William Selway in Washington at wselway@bloomberg.net Darrell Preston in Dallas at dpreston@bloomberg.net;

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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