Tax-exempt bonds, a key provision of federal tax law since 1913, enable the 50 states and their political subdivisions to issue bonds (collectively, “muni bonds”) at low, tax-exempt interest rates. This exemption is at risk of being eliminated in 2013. And for the wrong reason!
During the recent presidential race, both President Obama and Gov. Romney called for eliminating the federal tax deduction for interest received on muni bonds, thus ending a traditional power of the states that dates back to the 19th century. Their common message is that all deductions are bad because they help the wealthy at the expense of the middle class. However, in reality, all citizens benefit in the case of the tax exemption for muni bonds because it lowers borrowing costs for roads, schools, sewers, hospitals, water supply systems and a myriad of other capital improvements undertaken by state and local governmental units throughout the United States.
