NOT THE SHARPEST KNIFE IN THE DRAWER: Obama Jobs Plan Mauls Munis
Former American Express chairman and CEO of Harvey Golub, who now serves on the executive committee of the American Enterprise Institute, writes in this Wall Street Journal op-ed that President Barack Hussein Obama’s “new” jobs bill (AKA “Son of Stimulus”) “reveals a depth of cluelessness that boggles the mind.” He cites several obvious reasons, but here’s one you may not have considered:
[O]n the one hand he wants to devote almost half the $475 billion in additional federal spending to states, as he says, to employ teachers, policemen and firefighters and refurbish or build some new infrastructure that states have already decided they don't need or have deemed a low priority.
On the other hand, the bill will add billions of dollars per year to state and local government expenditures by reducing the tax benefit of state and municipal bond issues for taxpayers earning more than $250,000 per year. In total these bonds represent $2.5 trillion in outstanding bonds, with billions more issued each year.
The president obviously believes that tax-free bonds are a benefit to the buyers when, in reality, the benefit accrues entirely to the municipalities that issue the bonds. Because the bonds are tax-free, the issuers pay a lower interest rate – by an amount almost exactly equal to the tax benefit. By reducing the benefit, municipalities will be forced to pay significantly higher rates, increasing their annual debt-service cost. …
The president also wants these reduced tax benefits to apply to existing bonds, bought under the assumption of receiving the higher tax benefits. It is not very often that higher taxes are applied retroactively, but this will be one of those times. As a result, existing bondholders will see the value of their municipal bonds decline substantially based on the lower tax benefits.
Golub concludes that the president’s jobs plan proves that “economic illiterates were setting the economic policy of this administration.”
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