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Penn Financial’s Matt McCall discuss the major impact taxing interest on municipal bonds will have in small town America.
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The President Obama the Republicans have been at odds over -- in the fiscal cliff but there is one area where they both agree.
And that is.
Tax in the interest on municipal bonds these investments have always been tax -- since the beginning of the tax code.
Back in 1913.
So making them taxable.
Can have a huge change and a huge impact not only on investors but on cities and towns and counties that -- them.
Joining me now CEO -- financial Matt McCall.
This you know what what I was back in the investment business this was one I always thought was constitutionally protected.
Until 1988.
The Supreme Court said no congress can change this.
And if they want to tax the interest on municipal bonds they can now they're talking about it.
This -- be a major change and I think the reason we're talking at this time has been a majority of people own these mr.
bonds are would consider high net worth investors so it's gonna be the wealthy that they're going after south.
Agassi lot of Democrats want to go after and Republicans.
From an investment standpoint the reason the wealthy go into this is because they pay such high taxes are ready that they looked municipals as tax free investments is suddenly that is taken away.
The track of this of municipal bonds goes away with that.
-- and for that and for the audience.
That this cities and counties and states pay a much lower interest rate then what a corporation or an individual -- because it's tax free.
Exactly so sadly if that goes up which the rates have to then go up to make it attractive because if I can then -- -- corporate corporate -- get a higher tax rate at the same.
Tax level that why would -- not going to corporates vs municipal yeah so what happens -- -- -- that the charge a higher interest rate to try to attract.
Just and purpose for purposes of discussion if if corporations pain 5% and a city's pain 3%.
Why would you ever take -- 3% because after tax 3% might be more for a Heidi a bracket individual than a 5%.
Pay the tax wind up with.
Less than three.
Exactly what investment -- have -- it's it's an ATF and exchange traded fund of high yield municipal bonds some some basic junk -- missiles that currently yields four point 5% which sounds great.
But if you're 35% tax bracket the tax equivalent is actually six point 9% so -- define corporate it's paying basically seven.
That do that and you're not gonna do that -- -- find something is really.
Low grade and high -- high risk as well as something along those lines so if this happens.
And they do taxes this would be -- this is this could be -- -- again since 1913.
The cities and counties have been able to borrow in the money is the interest -- not been taxable.
What happens in the cities in calories.
Well that's what had that's what movies -- talking about right now that all the talking about is -- -- we're gonna hit those high end investors sure you gonna hit them as well but now if I'm if I'm a city.
And make -- an act of broad money at 2% subtly I have to national corporates you mentioned a moment ago the corporate may be 4% might borrowing cost the city -- double.
CAD stays -- as we know are -- in trouble if their borrowing costs double or go up.
What I think happens because fired -- -- police -- this trickles down everybody so if you have done an investment in a municipal bond.
And they start tax you know what's gonna happen well I think of value gonna see drop immediately because what's gonna happen is the new Muni bonds coming out of future -- higher interest rates of people would rather get a higher interest rate.
As rates go up bond prices fall to -- he probably value fall.
As part ETS a lot of people investing -- -- budget through mutual funds or exchange traded funds.
You'll see the value of them drop dramatically typically they move a few pennies a day you see 506070.
-- moves in one day wiping out a whole year's worth the gains.
So not good for the investor.
Not good for the city is the states the county's.
That all and end the investors would bail out of this thing so that wouldn't really make a change to -- revenue coming into the treasury.
That's the thing to think by abide by changing -- an increase revenue but it's probably you know we look -- -- -- revenue probably be the same be stagnant at best.
And really what this does it puts more the federal government because of the city has basically build out what do they go into the federal government itself it -- -- -- the end game is there's nothing good about this keep the tax rate.
That's what they're talking about -- fair we'll see what -- never call thank you a sudden you don't have.
