Jan. 13, 2003 — President Bush’s proposal to eliminate taxes on corporate dividends could cause problems for the municipal bond market.
At the very least, money managers and market watchers said, the plan might make stocks more appealing to individual investors, who have long bought municipal bonds because of their tax advantages. Interest income produced by bonds issued by state and local governments is not taxed by Washington, and often is not subject to state tax.
“Everything else being equal, (municipal bonds) would face some additional competition from (equities),” said Arnold Kaufman, editor of The Outlook, a Standard & Poor’s investment newsletter that focuses on corporate stock dividends.
“We think at the margin it certainly makes stocks more attractive,” Mary Miller, assistant director of fixed-income investments for T.Rowe Price Group (TROW), said of the administration’s plan to end taxation of dividend payments. Price oversees about $8.5 billion in municipal bond funds.
If enacted, the proposal also would force state and local governments issuing bonds to hike their yields to encourage people to invest in them, observers said.
Some, however, don’t believe municipal bonds or bond funds will suffer as a result of the tax law change.