Amanda Albright (Bloomberg Law): Tax-the-Rich Boosts Appeal of Bonds That Give Shelter to Wealthy

Democrats around the country are pushing forward on plans to tax the rich — moves that are supportive for the tax-exempt municipal-bond market.

The momentum toward higher taxes on the wealthy bodes well for the muni market, which offers a tax shelter for residents in those states. Income from the interest on muni bonds is typically exempt from state levies, though Illinois, another state with a tax-the-rich effort underway, generally does tax the interest.

Western Asset Management’s Sam Weitzman said in a note last week that Washington’s new millionaires’ tax “carries meaningful implications for municipal valuations.”

For higher earners, the value of the exemption on state bonds would increase, based on a metric known as taxable-equivalent yield, which compares different bonds taking into account their respective tax advantages. In order to compete with a tax-exempt Washington bond, a taxable bond would need to yield 116 basis points more, or 6.9% on average, Weitzman said in the note.

“This increase should support stronger in-state demand, likely putting downward pressure on yields for Washington issuers,” Weitzman wrote.