President Obama recently delivered a draft of his Plan for Economic Growth and Deficit Reduction (the "Debt Reduction Plan") to Congress. The Debt Reduction Plan provides for a steady reduction of the nation's outstanding debt as a percentage of gross domestic product. If certain targeted ratios are not met in a given fiscal year, however, the Debt Reduction Plan provides for automatic cuts in spending and tax preferences – cuts that could adversely affect the tax exemption with respect to municipal bonds.
Another plan recently introduced by the President in the form of the $447 billion American Jobs Act of 2011 (the "Jobs Act") also contained provisions that threatened the tax exemption on municipal bonds. The U.S. Senate recently defeated the Jobs Act by a vote of 50 to 49 (60 votes were needed for cloture). If adopted, the Jobs Act would have capped the amount of tax-exempt interest, and other related expenditures and deductions, to 28% for all individuals earning $200,000 or more and for married couples earning $250,000 or more. The White House has indicated that the President intends to split up the Jobs Act into smaller pieces for resubmission.
The one-two punch of the Jobs Act and the Debt Reduction Plan has shaken the municipal bond market. At the National Association of Bond Lawyers' Bond Attorneys' Workshop, recently held in San Antonio, Texas, industry concern was expressed in a panel called "Tax Reform Update." Panelists agreed that the already suffering municipal bond market could be irreparably damaged by continued attacks on the exclusion of bond interest from gross income – the foundation of the market.
As workshop attendee Bruce Graham, partner at Goodwin Procter, noted: "tax exemption has gotten a bad rap from members of both parties in Congress ... market participants would do well to remind lawmakers that tax-exempt municipal bonds provide the most cost-effective financing vehicle we have for vital infrastructure."
Goodwin Procter LLP is one of the nation's leading law firms, with a team of 700 attorneys and offices in Boston, Los Angeles, New York, San Diego, San Francisco and Washington, D.C. The firm combines in-depth legal knowledge with practical business experience to deliver innovative solutions to complex legal problems. We provide litigation, corporate law and real estate services to clients ranging from start-up companies to Fortune 500 multinationals, with a focus on matters involving private equity, technology companies, real estate capital markets, financial services, intellectual property and products liability.
This article, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin Procter LLP or its attorneys. © 2011 Goodwin Procter LLP. All rights reserved.
We operate a free-to-view policy, asking only that you register in order to read all of our content. Please login or register to view the rest of this article.