| The Build America Bonds (BABs) program, a new | | | | program might have on existing tax exempt |
| piece of legislation from the Obama | | | | municipal bonds. The BABs program only allows |
| Administration, focuses on aiding struggling state | | | | bonds to be sold for new projects, not to |
| and local municipalities across the U.S. The | | | | refinance debt incurred in the past. An issuer can't |
| program, part of the American Recovery and | | | | issue BABs to call old debt. Therefore, if the |
| Reinvestment Act of 2009, creates taxable | | | | BABs program gains significant momentum, the |
| municipal bonds, a radical departure from the | | | | municipal bonds currently in the marketplace are |
| long-standing tax exempt status quo for munis. | | | | less likely to be redeemed early. As a result many |
| While bonds issued under the BABs program are | | | | of the bonds already issued are, in-effect, |
| fully taxable, the issuer receives a direct subsidy | | | | non-callable. More importantly, if new issues of tax |
| equal to 35% of the bonds coupon, or stated | | | | exempt bonds are virtually non-existent, the |
| interest rate. The intent is to make some of the | | | | demand for existing issues by the highest tax |
| benefits of traditional muni bonds available to | | | | payers could increase significantly. |
| investors outside the highest tax brackets. | | | | Some critics of the program argue that while |
| For many years there has been talk within the | | | | BABs might have some benefits for those outside |
| Treasury Department and the IRS that the tax | | | | the highest tax brackets, the wealthiest individuals |
| exemption for municipal bonds is an inefficient | | | | will still reap the most rewards. While this might be |
| subsidy since it allows only the highest taxpayers | | | | the case, I applaud the program's goal of trying to |
| to benefit from the tax exempt income. At | | | | bring the median income individual into the muni |
| current tax rates, top bracket earners avoid | | | | bond market. This could very well be a nice |
| paying 35% on that income. That benefit | | | | addition for those living on their income from |
| obviously will increase if/when taxes go up. | | | | investments (like CD's, etc.) and a huge win for |
| The BABs program will have significant benefits if | | | | municipalities in those parts of the country that |
| it is embraced by lower bracket earners who | | | | are struggling right now. |
| need taxable income from their investments. The | | | | That said, the biggest winners just might be those |
| program will make it easier for municipalities to | | | | that already own the old-style, tax exempt |
| raise needed funds by bringing in a large new | | | | version of municipal bonds. We are telling our |
| group of investors that have not previously | | | | clients to hold on to their high quality Arizona tax |
| participated in the municipal bond arena. | | | | free bonds. |
| There is some question about what effect this | | | | |