How Tax Reform Would Hinder Muni Bonds

A federal border adjustment tax (BAT) would negatively affect counties’ cash flow by causing downturns in the municipal bond market, reports Ian Adams, Associate Vice President of the R Street Institute for Governing. It would also impact many states’ tax revenues from the insurance industry and potentially increase costs to local governments to provide social services.

A BAT will likely serve as a central component of congressional tax reform proposals – at least of the plan coming from House Republicans. BATs tax imports but not exports, favoring domestic production and supply, and raising costs of international capital. Insurance companies depend upon international capital as a means of diversification, “to keep insurance prices down and policy coverage broad.”

So what does this have to do with counties?

U.S. life insurers invest about 75 percent of every new premium dollar in fixed-income debt markets, and often are the only buyers for some kinds of bonds, particularly long-term debt. In fact, municipal bonds are among insurers’ most significant long-term investments: Property and casualty insurers held $326.8 billion in municipal bonds at the end of 2012, according to the National Association of Insurance Commissioners, while life insurers tripled their muni holdings from $47.1 billion in 2008 to $131.2 billion in 2012.

By driving down insurers’ bond investments, a BAT would harm the ability of state and municipal governments to borrow long-term. ….

[A] BAT would further stretch limited state and local resources because it would push financial-planning products such as insurance beyond the reach of many of those teetering on the brink of public assistance. While the federal government might be called upon to support some of those needs, most of that extra load would need to be carried by state and local authorities.

A BAT could also reduce the flow of revenues from gross premium taxes paid by insurers to states.

Read the full article here.

For an interesting 20 minutes on BATs, listen to the Tax Policy Center’s new podcast, Taxology.