Muni-bond market can rest a bit easier under revised tax plan
Anyone who owns a municipal bond can breathe a sigh of relief. And at least for the rest of the year, so can state and city governments. The Senate Finance Committee voted 19 to 0 Monday that interest on existing municipal bonds, or ones issued before Jan. 1, 1987, will continue to be exempt from federal taxes.Skip to next paragraph
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The concern that muni-bonds would be taxed had played havoc with the bond markets last week, virtually stopping trading and causing state and local governments to put off issuing new bonds.
The Finance Committee did not decide whether bonds issued after 1986 would be taxable. If they are, it would be much more expensive for cities and states to raise money, since they would have to raise the interest rates they pay on bonds to attract buyers. Eventually, critics of the proposals say, taxpayers would foot the bill for higher cost services.
The municipal bond issue is only one of many controversial portions of the tax reform proposal by Sen. Robert Packwood (R) of Oregon, who is chairman of the Finance Committee. Perhaps most controversial is its treatment of excise taxes and tariffs.
The House in December passed a bill to lower tax rates and cut out special preferences. The Senate Finance Committee hopes to have a Senate bill passed by June and to present President Reagan with a joint House-Senate agreement in August.
Many companies appear to be fairly satisfied with the House version -- as satisfied as one could expect, given that their tax burden would be increased by $140 billion over five years. There are major exceptions, in the area of real estate and natural resources, which would lose some of the favorable tax treatment they have under the current law.
What is most appealing about the House bill is that it lowers the top tax rate from 46 percent to 36 percent. That helps high-bracket taxpayers. It also aids large companies that make consumer goods, light industry, and service-sector firms. These currently don't buy a lot of equipment and therefore cannot deduct the capital investment.
The Senate bill, proposed by Mr. Packwood last week, lowers the maximum rate to 35 percent and preserves special preferences for mining, oil-drilling, and timber interests to help get it through committee. But it has come under attack by companies that had been staunch supporters of tax reform. And it contains some provisions that could have a peculiar effect on business, economists and tax accountants say.
One effect might be to push some companies into bankruptcy, or at least merger.
The Packwood proposal would no longer allow manufacturers to deduct excise taxes from their pretax income. That would raise an estimated $62 billion in revenue. However, it would have the effect of raising the cost of the excise tax to the manufacturer by 35 percent or more, economists say.
This could cause a jump in the prices of goods that are subject to excise taxes: airline tickets, gasoline, tobacco, liquor, telephone services, wagering, gasoline, and products moved by highway trucking, to name a few.
With products like cigarettes, where the buyer is less sensitive to price increases, it's fairly easy to pass on the cost. But in industries like airlines or trucking competitors often can't pass on the increase to the consumer for fear of losing customers.
``Any time there's a change in the game rules, you hurt the marginal companies,'' says Thomas Ochsenschlager, a partner at the accounting firm Grant Thorton. Their alternatives, he says, are to raise prices and lose customers, or to absorb the increased costs.