The Debts of the Spenders: Obama's Tax Hikes and Muni Financing Backdoor

Tax hikes. That is one way the feds could help troubled localities and states finance their funding obligations. Despite all the hullabaloo about the US loss of wealth, America continues to retain a disproportionately large share (compared to the rest of the world) of rich or at the very least well to do.

President Obama's budget proposes to hike the marginal tax rates of the wealthy to 36% and 39.6% beginning in fiscal 2011, and to increase by 5% the capital gains and dividends tax rate for the wealthy - tax changes that market participants say could lead to higher demand for tax-exempt bonds.

"The Obama tax hike [on the marginal rates] would mean that muni investors could buy bonds about 40 basis points richer in yield to achieve the same after-tax yield," said Matt Fabian, a managing director at Municipal Market Advisors.

Wealthy would be defined as married couples earning over $250,000 and individuals earning $200,000 or more.

However, the administration has abandoned a proposal aired in a budget outline released in February that would have capped the amount of deductions taxpayers could take at 28%, another move that may have pushed wealthier investors into the muni market.

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