Bernardi Study Warns Against Repeal of Tax Exemption for Municipal Bonds

For Immediate Release
Contact: Hud Englehart
Beacon Advisors
[email protected]

Chicago, IL, December 14, 2011– Citing a set of unintended, potentially adverse consequences, one of the Midwest’s leading municipal bond broker-dealers today called on legislators and policymakers to analyze all the facts before moving to eliminate tax exemptions for investors in the municipal bond market.

“Tax-exempt municipal bonds are the anchor of a highly efficient, remarkably productive capital market,” said Ronald Bernardi, President of Bernardi Securities, Inc. in Chicago. “We’ve studied the possible effects of repealing the exemption and we think the results are more notable for the perils they portend than the benefits they reveal.”

In a white paper distributed to clients and lawmakers this week, Bernardi cited these key concerns with repeal of the exemption on municipal bonds:

  • Non-partisan market researchers estimate the revenue gain from repeal to be 65 percent lower than government estimates that unrealistically assume individuals will not adjust their portfolios and exit when the exemption is eliminated. 
  • Supporters of repeal do not take into account jobs and other benefits that accrue to taxpayers as a result of projects that are financed with tax-exempt bonds. Repeal at a time when policymakers are counting on public infrastructure projects to spur job growth seems antithetical to such efforts. 
  • One of the proposed alternatives – a taxable security with a guaranteed interest subsidy from the federal government – puts national taxpayers on the hook for local debt programs and creates the specter of another FNMA-FREDDIE MAC disaster along the lines of the subprime mortgage. Subsidizing taxable securities has the effect of shifting local debt obligations to an already burdened US Treasury.
  • Federal intervention also crosses the line when it comes to reciprocal immunity and separation of powers. Local authorities under such a plan will lose autonomy when it comes to their own financing and project management.

Bernardi Securities’ report concludes that tax-exempt bonds have been “a critical source of capital for states and municipalities and, as a readily available financing vehicle, support one of the nation’s most consistent and reliable sources of job creation.” 

“That being the case, the tax-exempt municipal market does not need to be restructured or, in parlance du jour, ‘occupied,’ Bernardi said. “Instead, its status needs to be reaffirmed so that it can keep on doing its job without forcing new and unnecessary burdens on issuers, investors and taxpayers.” 

About Bernardi Securities, Inc.

Bernardi Securities, Inc., headquartered in Chicago, Illinois, specializes in municipal issues and offers clients a proven, conservative approach to municipal investing. The company’s commitment to research and active portfolio management has consistently produced solid returns for client portfolios – even during the 2008 financial crisis. The firm also acts as an underwriter and has underwritten and marketed over the past few years more than $1 billion in bond issues to help finance public purpose municipal, county, school, park and water/sewer districts throughout the country. 

The Case for an Efficient, Low-Cost, Job-Creating Tax Expenditure

This document has been prepared by Bernardi Securities, Inc. (BSI) for our clients and other interested parties. Within this document, we may express opinions about the direction of financial markets, investment sectors, trends, and taxes. These opinions should not be considered predictions of future results, and are subject to change at any time. Past performance is not indicative of future returns. Nothing in this document represents a recommendation of any particular strategy, security or investment product. This information is provided for educational purposes only and was obtained from sources considered reliable, but is not guaranteed and not necessarily complete. BSI offerings are made by prospectus or official statement only. Income may be subject to state and local taxes and the federal alternative minimum tax. Additional risks associated with investing in municipal bonds include credit risk, interest rate risk, and reinvestment risk. Please consult your tax professional regarding the suitability of tax-free investing. Please consult your investment specialist for more information. 

Municipal bonds not FDIC insured * May lose principal * Not appropriate for all investors