Van Eck Global - Since 1955


Clean That Wall - Wednesday, 02/22/2012

  • Election year posturing
  • Another assault on municipals
  • Double whammy for taxpayers

A particular saying I used to hear around the office of my first job was, "let's throw it against the wall and see if it sticks", comparing the testing of new ideas to the testing of properly cooked spaghetti. I was reminded of this analogy as I read several recent articles with headlines like "Obama Seeks to Curb Muni Bond Tax Breaks, Again." Sparing you the minutiae, the recent Obama 2013 budget plan repeats much of what was originally in the hands of the "Super Committee" last fall. The committee was charged with repairing the deficit, and its guidelines included initiatives to reduce, if not completely repeal, the tax benefits currently offered by municipal bonds.

It strikes me as especially desperate and lacking in constructive thinking to, in this instance, steal from Peter in order to pay Paul. By imposing a tax on income derived from tax-free bonds, Obama's plan would instantly devalue portfolios holding nearly a half trillion dollars in open-end mutual funds. Furthermore, the cost of capital would increase for state and local municipalities that depend on this market to finance roads, bridges, schools and hospitals at low cost to their taxpayers.

On top of this is Obama's desire to revive the highly successful Build America Bond program, at a subsidy rate lower than the original rate in the Stimulus Act of 2009 [a.k.a., The American Recovery and Reinvestment Act of 2009]. Municipals would, therefore, become an even more complex asset class.

If this sounds confusing, it is. In the context of an election year, I believe there is little likelihood of Obama's proposed 2013 budget passing. However, by extension of the analogy, if you throw enough spaghetti against the wall SOME of it is going to stick. And it will be messy. Will the taxpayers have to foot the bill to have the White House walls cleaned? 

 

Important Disclosure 

Van Eck Associates Corporation does not provide tax, legal or accounting advice. Investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service.

Please note that MUNI NATION is written by Jim Colby and represents his opinions, and these opinions may change at any time and from time to time. MUNI NATION is not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Non-Van Eck Global proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Global. © 2014 Van Eck Securities Corporation. MUNI NATION is a trademark of Van Eck Associates Corporation.

All indices listed are unmanaged indices and do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made.

Any discussion of specific securities mentioned in the commentary is neither an offer to sell nor a solicitation to buy these securities.

Municipal bonds are subject to risks related to litigation, legislation, political change, conditions in underlying sectors or in local business communities and economies, bankruptcy or other changes in the issuer’s financial condition, and/or the discontinuance of taxes supporting the project or assets or the inability to collect revenues for the project or from the assets. Bonds and bond funds will decrease in value as interest rates rise. Additional risks include credit, interest rate, call, reinvestment, tax, market and lease obligation risk. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds.

The income generated from some types of municipal bonds may be subject to state and local taxes as well as to federal taxes on capital gains and may also be subject to alternative minimum tax.

Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 888.MKT.VCTR | 888.658.8287. Please read the prospectus and summary prospectus carefully before investing.  

Not FDIC Insured — No Bank Guarantee — May Lose Value 

Van Eck Securities Corporation, Distributor
335 Madison Avenue, 19th Floor
New York, NY 10017
888.MKT.VCTR | 888.658.8287