Is the end of Tax-free Municipal bonds near? The tax rate for municipal bonds may be eliminated if new legislation passes. The Congressional Budget Office estimated that $143 billion could be saved from 2012 through 2011, if the tax exempt status was replaced with a direct federal subsidy. The subsidy would resemble the Build America Bond program we’re the federal government subsidized bond issuers by paying a percentage of their interest costs. Existing municipal bonds would retain their current tax exempt status.
While there is no guarantee that this will pass, investors need to watch this closely. If this were to become law, current municipal bonds and municipal bond funds would become a stagnant market. High-quality bonds might trade have higher premiums, while low quality municipal bonds might find few buyers. If this legislation looks like it’s going to pass, high-quality long-term municipal bonds might be a good bet.