President Obama’s jobs plan includes a proposal that has largely gone unnoticed: He wants to limit the interest from municipal bonds that high earners (incomes above $200k would be impacted) can exclude from their income.
This tax increase would surely raise some federal government revenue, but would also discourage investment. Moreover, as Bloomberg notes, this essentially amounts to robbing Peter to pay Paul:
The curbs could push up borrowing costs for local governments already coping with fiscal pressure from the after- effects of the recession and a loss of federal stimulus money.
The interest payments on state and local government bonds have been exempt from U.S. income taxes since the levy was first introduced a century ago. Because those earnings are exempt from taxation, investors are willing to accept lower returns. That saves public agencies money on construction projects.
While nearly every municipality in America is cutting their budget — Obama has proposed an idea to further increase their borrowing costs.
This strikes me as unbelievably shortsighted.