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How the Build America Bond Program Will Impact Municipal Bonds

Build Bonds American (Babs) program, a new piece of legislation of the Obama Administration focuses on helping struggling state and local cities throughout the US This program, part of the American Recovery and Reinvestment Act of 2009, creating municipal bonds taxable, a radical departure from the status quo for long tax-free munis.

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Bonds issued under the program is fully taxable Babs, publishers receive a direct subsidy equal to 35% of the bonds coupon or interest rate determined. The intent was to make some of the benefits of traditional muni bonds available to investors outside the highest tax brackets.

Over the years there has been talking in the Treasury Department and the IRS that the tax exemption for municipal bonds is subsidizing inefficient because it allows only the highest taxpayers to benefit from tax-free income. Current tax rates, the top bracket recipients avoid paying 35% of the income. the obvious benefits would increase if / when taxes rise.

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The Babs program will have significant benefits if adopted by the lower bracket requiring recipients of taxable income from their investments. This program will make it easier for the city to collect the funds needed to bring a new group of investors who previously did not participate in the municipal bond arena.

There are some questions about what effect this program possible in tax-free municipal bonds that exist. The Babs program only allows the bonds to be sold to new projects, not refinance the debt incurred in the past. An issuer can not issue a call, Babs, for old debts. Therefore, if the program Babs gain significant momentum, municipal bonds currently on the market tend to be redeemed early.

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Consequently, many of the bonds already issued are, in-effect, non-callable. More importantly, if new issues tax-free bonds are almost nonexistent, the demand for existing issues with the highest taxpayers can increase significantly.

Some critics argue that while the Babs program may have some benefits for those outside the highest tax brackets, individuals will still reap the richest rewards. While this may be the case, I applaud the purpose of the program tries to bring the average individual income in the muni bond market.

It could very well be a great addition for people who live on their income from investments (such as a CD, etc.) and a great victory for cities in other parts of the country who are struggling right now.

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That said, the biggest winner may be people who already have an old-style, tax-exempt version of the bond area. We advise our clients to hold on Arizona tax-free bonds of high quality.

Brad East, (Senior Vice President of Moors & Cabot in Phoenix, AZ, is a 17-year veteran of the securities market and an expert in the arena of local bonds. Moors & Cabot was founded in 1890 and has offices around the country.