Plans to tax munis won’t fly: BNY Mellon

Renewed proposals to eliminate the tax-exempt status of municipal bonds as a way to reduce the $1.5 trillion federal deficit are unlikely to succeed, according to a report by The Bank of New York Mellon Corp.

Renewed proposals to eliminate the tax-exempt status of municipal bonds as a way to reduce the $1.5 trillion federal deficit are unlikely to succeed, according to a report by The Bank of New York Mellon Corp.

Abolishing the asset class would drive up borrowing costs and further strain the budgets of muni issuers, leading to cuts in services and capital projects, according a report by Standish Mellon Asset Management Company LLC, the fixed-income arm of the investment bank.

A proposed budget submitted by Rep. Paul Ryan, R-Wis., the House Budget Committee chairman, and a report from the Simpson-Bowles presidential deficit commission both urged the discontinuance of the tax-exempt treatment of municipal bonds, the report said.

“The urgent scramble to address the ballooning federal deficit will reasonably seek to uncover every scheme to broadly raise revenues, bringing all major tax expenditure loopholes under intense scrutiny,” wrote Steven Harvey, a senior BNY Mellon portfolio manager, and Nathan Harris, a research analyst.

The analysts concluded, however: “We believe it is unlikely that municipal entities will be penalized.”