How Would Municipals Fare Under Romney?

Last month, we wrote that changes to the tax code being discussed in Washington would affect the value of municipal bonds. While that analysis still holds true, that was before the election campaign engines really revved up. Now there’s more chatter, if not more clarity. My colleague Michael Brooks weighs in.

William G. Gale, co-director of the Urban-Brookings Tax Policy Center and one of the most respected tax policy economists in the nation, has published a report that includes a discussion of the tradeoffs of Romney’s tax proposals. Details of Romney’s plan have not been released, forcing Gale to make certain assumptions regarding which tax expenditures would be “on the table” and which would be “off the table.” 

Included among the off-the-table tax expenditures in Gale’s report is the municipal bond tax exemption, largely because Romney wants to encourage savings and investment.

Unfortunately, the crystal ball is a little murky, because Romney’s own economic advisor Glenn Hubbard apparently told The Wall Street Journal here that the muni bond exemption was “definitely ‘on the table.’” 

What we know for sure is, until the Romney campaign releases more details about its tax policy proposals, it will be impossible to determine if the muni bond exemption might be at risk under a Romney presidency.

There is one interesting point, however, that we can glean from details Romney has released about his plans to revise the tax code. Romney is on record as saying he would like all the tax rates to be reduced by 20%, which would lower the current top rate to 28%. Comparing this to the top rate of 39.6% scheduled for next year under current law, there’s no question that the tax advantage municipals enjoy would be significantly eroded.

Furthermore, Romney is also apparently on record as saying he wants taxpayers with adjusted gross incomes below $200,000 to pay no tax on interest income from Treasuries or corporate bonds. This could have an impact on the retail municipal market, as investors in that income category could choose among municipals, Treasuries and corporates, all on an equal tax footing, thereby reducing demand for municipals. That assumes, of course, that he has not altered the tax exemption for municipals.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Douglas J. Peebles

Chief Investment Officer—AB Fixed Income
Douglas J. Peebles is the Chief Investment Officer of AB Fixed Income and a Partner of the firm, focusing on fixed-income investment processes, strategy and performance across portfolios globally. As CIO, he is also Co-Chairman of the Interest Rates and Currencies Research Review team, which is responsible for setting interest-rate and currency policy for all fixed-income portfolios. In addition, Peebles serves as Lead Portfolio Manager for AB’s Unconstrained Bond Strategy, and focuses on managing the firm’s strategic client relationships. In 1997, he pioneered AB’s highly successful and innovative approach to global multi-sector high-income investing, which is now being adopted by other firms. Since joining AB in 1987, Peebles has held several leadership positions, including director of Global Fixed Income (1997–2004), co-head of AB Fixed Income (2004–2008) and Head of Fixed Income (2008–2016). He holds a BA from Muhlenberg College and an MBA from Rutgers University. Location: New York

Michael G. Brooks

Senior Portfolio Manager
Michael G. Brooks joined Bernstein in 1991 as a senior municipal credit analyst and is a member of the Tax-Exempt Fixed-Income Investment Policy Group. For the preceding 13 years, he was with the Office of the New York State Comptroller, most recently as director of its Bureau of Fiscal and Economic Analysis, where he was responsible for monitoring the finances of New York City and forecasting its tax revenues and economy. Prior to that position, Brooks was a planning consultant, forecasting the impact of locating nuclear power plant facilities in Maryland. He frequently makes presentations to groups of clients and investment professionals on a variety of subjects relating to municipal bonds. Brooks earned a BA in urban economics from The City College of New York and an MA in city and regional planning from Rutgers University. Location: New York

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