Groups Fight to Preserve Tax-Exempt Status of Municipal Bonds

For what municipal bonds lack in terms of exciting return profiles, the asset class makes up for with other advantages. Those include low volatility, reliable income and a variety of tax advantages that make these bonds appealing to retirees and high-net-worth investors. This is particularly true for those living in states with elevated tax burdens.

The issue with tax advantages is that existence of those benefits is dependent on government policy. This implies those positives can be on the table for adjustments (or worse) when governments need to raise revenue. Fortunately for advisors and investors considering municipal bonds and ETFs such as the ALPS Intermediate Municipal Bond ETF (MNBD), the tax treatment of munis wasn’t altered in the One Big Beautiful Bill.

Additionally, there is support to ensure the tax breaks offered by municipal bonds remain out of harm’s way. Assuming those efforts are successful, ETFs such as the actively managed MNBD could benefit.

Protection for MNBD Perks Is Pivotal

The Public Finance Network is among the groups pressing Congress to continue supporting the tax advantages offered by municipal debt.

“We appreciate that Congress recognized that elimination, reduction, or capping of the tax exemption would pose immediate increased costs to the critical projects financed by state and local issuers and preserved this critical local financing tool already this Congress,” the group wrote in a recent letter to federal lawmakers. “Added costs to capital projects would force state and local governments to make difficult and pro-recessionary choices and these increased costs would ultimately be borne by the American taxpayer.”

The bipartisan support to protect municipal bonds’ tax advantages is a rarity in today’s political climate.

Importantly, it’s not just investors that benefit from municipal bonds. It’s the issuers themselves. If these bonds lose favorable tax treatment, demand would likely wane, putting states and cities in precarious financing positions.

“Municipal bonds finance infrastructure projects that go well beyond just roads and bridges. This is evidenced in the broad diversity of the issuer groups listed below,” noted the National Conference of State Legislators. “Public projects that rely on tax-exempt municipal bonds include the construction and preservation of roads, airports, highways, bridges, public transportation, affordable housing, water and wastewater facilities, schools, libraries, town halls, nonprofit hospitals and universities, and electric power and gas facilities.”

Bottom line: Protecting the tax advantages of municipal bonds is positive for investors and issuers and it could lead to more of the former embracing assets like MNBD.

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