President Obama’s deficit reduction plan includes a controversial call for eliminating the tax-free status of muni bonds for affluent taxpayers. The provision would dramatically impact planning options for the retirees who favor tax-free bonds and shift the way state and local governments secure much needed funding for public projects.

The administration can expect strong resistance to his proposal from Republicans and state and local governments that rely on the tax-free status of their bonds to create additional demand and lower their borrowing costs. Investors are willing to take much lower returns on municipal bonds than they are on other investments since income on the bonds is not taxed. That keeps the cost of borrowing down for states and local governments. Eliminate the tax break and states will see their borrowing costs rise significantly.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of municipal finance in Advisor’s Journal, see Life Settlements—Savior of Municipal Finance? (CC 11-97).

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