WASHINGTON -- Rep. Benjamin Cardin, D-Md., introduced a bill yesterday that would have a major effect on the municipal bond market by repealing a tax law change that was enacted last year for market discount bonds.
Market discount bonds are bonds purchased at a discount in the secondary market.
The Cardin bill., H.R. 4714, would restore the tax treatment of these bonds to their pre-April 1993 status so that the discount from the bonds is treated as capital gains rather than ordinary income.
The bill would reverse a tax law provision enacted last year which said that for bonds purchased at a market discount after April 30, 1993, the discount had to be treated as ordinary income rather than capital gains.
The change was significant because while capital gains are taxed at a 28% rate and can be offset with capital losses, ordinary income is taxed at income tax rates of up to 39.6% for wealthy individuals.
In a statement on his bill, Cardin said the tax law change last year "reduced secondary market liquidity for municipal bonds and complicated the tax code unnecessarily."
The tax law change created mass confusion in the municipal market because traders were pricing market discount bonds differently and were unsure how to treat a de minimis rule that had been included in the tax law change.
Some securities firm officials had considered the new tax treatment for these bonds under the tax law change so onerous that they were proposing transactions under which issuers would issue new bonds and use the proceeds to refund or retire previously issued market discount bonds.