Last week, Representative Dave Camp (R-MI), Chairman of the House Committee on Ways and Means, unveiled draft legislation on tax reform that would include a 10 percent tax on municipal bond interest for joint filers with incomes over $450,000. The bill would eliminate all advance refundings, bank qualified bonds, and private activity bonds. It would also repeal the ability to issue any new investor credit or “direct pay” bonds. Of course, the proposal would make many other changes to the tax code in addition to the changes to the municipal bond provisions, and the chance of the bill being enacted this year has been described as “slim to none.” However, these proposed changes to the treatment of municipal bonds should not be ignored. Unless objections to the bond provisions are communicated to our elected officials, they may be included in future tax reform legislation as offsets for additional spending, or as part of broader tax reform proposals.
At this time, it does not appear that Representative Camp’s proposal is part of a broader Republican effort on tax reform. As reported by Politico, when asked by reporters if the bill could be considered the House Republicans’ position on tax reform, Speaker John Boehner (R-OH) said "you're getting a little ahead of yourself."
Nonetheless, this type of proposal may cause some volatility in the market and cause some investors to consider whether they should require a higher yield to compensate for the risk that such a proposal might be adopted. If Representative Camp’s proposal is formally introduced, consideration will need to be given as to whether the introduction of the bill should be specifically disclosed in official statements, along with the generic tax risk language that currently appears in most official statements to the effect that various tax proposals are made from time to time which, if adopted, could affect the yield to investors.