David R. Kotok, the chairman and chief investment officer of Cumberland Advisors in Vineland, warned Thursday that the outcome of the presidential election may affect the tax-free municipal and state debt that is a key part of the $2.1 billion in assets the firm manages.
Kotok cited a September research paper by the National Association of Bond Lawyers that said the Obama administration has proposed limiting the value of the tax exclusion for government bonds.
Many people invest in muni bonds to provide some tax-free income. The bond lawyers said more than 5 million U.S. households with incomes of less than $250,000 a year have some such tax-free investments, and the overall U.S. muni bond market is worth $3.7 trillion.
Kotok noted that limiting the tax-free exemption was discussed by the Simpson-Bowles Commission on getting federal finances under control, but only with regard to newly issued state and local bonds.
The administration proposal would apply to existing and future muni bonds, reducing their value — for example, a tax-free, 10-year, 5 percent bond worth $1,000 would drop in value to $950, the bond lawyers said.
If that same bond were to become fully taxable, its value would drop to $850.
Municipalities and states issue tax-free bonds in order to reduce their borrowing costs. With the incentive of tax-free earnings, bond buyers are willing to accept a lower interest payment by the bond issuer.
Kotok said the cost difference to municipalities is significant. “One can assume that the higher rates would become the norm in municipal finance if the tax-free status were to disappear.”
He said Cumberland doesn’t expect the tax-free status of municipal debt to be repealed, but “depending on the election outcome, it may be limited in future years as the Obama administration has proposed.”
Of course, predicting what politicians will do is even harder than predicting which ones will be elected, and Kotok furnished a standard disclaimer for such considerations: “Various proposals can alter this landscape, and all of them are subject to complex political outcomes.”
On Sept. 4, investment bank Morgan Stanley issued a “Credit Investor Election Guide” that reviewed the proposals of President Barack Obama and challenger Mitt Romney as they would affect investments.
The guide warned that “the tax treatment of munis would be at risk under either an Obama or Romney administration” and “it is difficult to state if one set is definitively better than the other.”
Next month, The Richard Stockton College of New Jersey will offer a new continuing studies program to become a certified financial planner in less than one year.
The program, approved by the Certified Financial Planner Board of Standards, is comprised of six courses, each with two full days in class followed by six weeks of instructor-led online study.
Individual courses cover each aspect of planning, including financial, insurance, investment, retirement, tax and estate planning. A final “capstone” course integrates all of the studies.
The first class will be held on Nov. 12, and successful students will receive their financial planner certificate on Sept. 7, 2013. The cost is $4,995.
For more information, visit www.stockton.edu/cs or call 609-652-4227.
Contact Kevin Post: