With the upcoming changes in the political arena, interest on municipal bonds is at risk of becoming subject to federal income taxation. Under the current U.S. tax code, when investors lend money to local or state governments to finance infrastructure — in other words, buy municipal bonds — the investor in-turn receives interest throughout the term of the loan that is exempt from federal income taxation.

However, as President-elect Donald Trump and a Republican-controlled Congress are mapping out their plans to finance massive infrastructure spending, they’re looking more to having governmental infrastructures financed in part by tax credits, private equity investments, and taxable municipal bonds to offset the credits or tax cuts.

Trump economic advisors, private-equity investor Wilbur Ross (Trump’s choice to lead the Department of Commerce), and University of California at Irvine business professor Peter Navarro question why interest should be exempt from federal taxation when the debt was issued by the state and local governments. The advisors additionally argue that municipal bonds aren’t an efficient way to pay for public projects because a percentage of the tax savings goes to the bondholder. Instead, federal tax credits and private investments are considered a more ideal supplement to existing financial programs, along with taxable municipal bonds.

Click the botton below to read the full article from Navarro and Ross discussing the potential changes to the municipal market by the Trump infrastructure plan.

Read the Article

If you would like to discuss this article or learn more, please contact Lashanda Stewart, Specialist in Tax Services, at lstewart@deandorton.com.