Taxable Municipal Bonds
Municipal bonds are debt obligations that are issued by states, cities, counties, and other municipal bodies to raise money for the construction of public infrastructure projects such as sewer systems, hospitals, schools, and roads. When you buy a municipal bond, you're actually giving money to the issuer who then pledges to pay you a certain amount of interest (often paid every two years) and to repay the principal on a particular maturity date.
Taxable municipal bonds were created because the federal government refused to fund some operations that did not significantly benefit the general public. Four types of bond offerings are federally taxable: investor-led housing, community sports facilities, refunding of a returned issuance, and borrowing to top off a municipality's underfunded pension plan. Municipalities that are subject to taxes provide yields that are more in line with other taxable industries, such corporate or government agency bonds. The taxable municipal market has grown astronomically in recent years. AMT included, $427 billion worth of taxable securities have been issued since 2008.
Investing in taxable municipal bonds has a variety of advantages:
- Safety - Compared to other taxable securities like corporate or government agency bonds, taxable municipalities are less prone to event risk because of their municipal backing.
- Value - In terms of security, municipal bonds are only second to the U.S. Government bonds. Taxable municipalities typically offer greater yields than corporate bonds and other government agency bonds.
- Liquidity - The majority of taxable municipal bond offerings are used to cover local and state pension shortfalls. This sector, which is still developing, would benefit from more liquidity since this issuance is predicted to increase.
- State tax exempt - Investors who live in the state of issuance are not subject to state taxes on their interest income when investing in certain taxable municipal securities that are free from state and frequently local taxes. As a result, their bond's effective yield will be higher than its stated rate. Investors in high-tax jurisdictions like California, New Jersey, and New York are particularly drawn to this.
Most taxable municipal bonds are issued to cover state and local pension fund shortfalls. In addition, taxable municipal bonds may be used to refinance debt, finance infrastructure repairs, pay for investor-led housing, or build local sports facilities.
Taxable municipal bonds include the Build America Bonds (BABs). BABs are taxable but contain specific tax credits and federal subsidies for either the bond issuer or holder, and they were established by the American Recovery and Reinvestment Act (ARRA) of 2009.
Institutional investors and mutual funds that are not eligible for other tax benefits are fond of taxable municipal bonds.
A local government, such as a city, county, or associated organization, may issue taxable municipal bonds as a fixed-income security to fund initiatives that the federal government will not fund.
Municipal bonds that are taxable are not free from taxes because they are frequently used to finance endeavors that do not directly benefit the general public.
Taxable municipal bonds are typically issued to cover state and local pension fund shortfalls.