Democrats May End AMT on Private Activity Municipal Bonds

Democrats are discussing several proposals for removing the Alternative Minimum Tax (AMT) which can impact holders of private activity municipal bonds. The impact would make the bonds more tax advantages but also lead to lower interest rates.

We're starting to get some clues of how Obama's stimulus plans may impact investors and the markets.  Bloomberg is reporting that Capitol Hill Democrats are discussing a proposal to remove the AMT from private activity municipal bonds, rendering them tax-exempt for all individuals. 

While the majority of municipal bonds are tax-exempt, a subset of bonds, those used to pay for non-profit or quasi-private projects like airports, housing projects, and arts centers, are tagged as private activity.  With these bonds, investors who are subject to the Alternative Minimum Tax (AMT) have to pay Federal tax on the bond.  

Eliminating the AMT would lower the cost to borrow for colleges, housing agencies, non-profits and others that are seeking funds for building projects.  Prviate activity bonds often pay their holders more (and thus cost the issuer more) because of their confusing tax status.  By eliminating the impact of the AMT, investors would be willing to purchase the bonds for less return.

Bloomberg writes:

"Repealing the AMT on individuals who buy the bonds would reduce borrowing costs, said Greg Principato, president of the Airports Council International-North America.

“Eliminating the AMT on airport bonds would provide significant savings, while also attracting more buyers” for the bonds, he said.

The largest AMT bond issued in 2007 was a $600 million student loan issue by Educational Funding of the South. Three other issues, all for airports in Miami, San Jose, California, and Washington, D.C., were between $530 million and $551 million."

This bill is one of three pro-municipal bond proposals being considered by Congress, as the government tries to find ways of channeling funds into infrastructure and building projects. 

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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