Political stalemate on Capitol Hill has frustrated the markets, but for municipal bond exchange traded funds, the bickering weakens any chance of a tax-code overhaul in tax-exempt munis.
Morgan Stanley Wealth Management’s John Dillon and Matt Posner, who follows federal policy for Municipal Market Advisors, point out that next year’s congressional elections and political posturing will likely push off an all-encompassing, tax-code overhaul, reports William Selway for Bloomberg.
“The likelihood of any changes to the treatment of the municipal bond tax exemption in 2014 are dim,” Posner said in the article. “This Congress is unable to get much done at all.”
President Barack Obama has proposed the possibility of eliminating the tax exemption and later suggested curbing it for the wealthiest taxpayers in an attempt to bolster government revenue. However, Congress has not given any inkling of changing the tax code.
“We don’t see much incentive in an election year for politicians to compromise,” David Litvack, head of tax-exempt bond research at U.S. Trust, a unit of Bank of America Corp., said. “Barring an unexpected sweep by the Democrats in the House of Representatives so that they would get a majority, we don’t see the same thing happening for the next two years as well.”
The iShares National AMT-Free Muni Bond ETF (MUB) offers a tax equivalent distribution yield of 5.57% and the SPDR Nuveen Barclays Municipal Bond ETF (TFI) comes with a taxable equivalent yield of 4.69%.
Any change to the tax break for state and local government debt would undermine the value of munis. Additionally, the break also helps fund state and city projects, such as roads, schools and other public works.
iShares National AMT-Free Muni Bond ETF
For more information on munis, visit our municipal bonds category.