Proposed Tax on Current Municipal Bonds Killed

In a vote portrayed by Chairman Bob Packwood as an unwarranted victory for the very rich, the Senate Finance Committee agreed today that municipal bonds now in the hands of investors should remain free of federal tax.

The action, taken by voice vote without dissent, helped quiet fears that had unsettled the market for municipal bonds, a term for any security issued by state and local governments. The committee will decide later whether to tax bonds issued in the future, but by a 19-0 vote the panel agreed that not even that change--if it is approved--would take effect before 1987.

“We are not talking about taxing the poor . . . not even the upper-middle incomes,” Packwood (R-Ore.) said. “We are talking about taxing the rich--the very rich.”

His proposal would have applied only to a few hundred thousand people whose incomes and deductions are so high that they are subject to a “minimum tax.”

Colleagues argued that it would be unfair to impose a tax retroactively.

The bonds issue was the first to face the committee as it began work on a bill fashioned by Packwood that would produce the biggest changes in the federal income tax in more than 30 years.

Afterward, the panel began analyzing Packwood’s provisions affecting the farm, timber, mining, and oil and gas industries but made no decisions. There is a major problem: The tax plan passed by the House would cost those industries about $8.8 billion over five years, while the Senate bill would cost them nothing.

On the bonds issue, Packwood cautioned that “if we exempt from taxation existing municipal bonds, then we are going to see stories of very wealthy people . . . paying no tax.” He noted estimates that 56% of all tax-free bonds held by individuals are owned by families whose incomes are at least $280,000 a year.

“Do we want to put the federal government on a course of taxing state and local obligations?” asked Sen. Dave Durenberger (R-Minn.). “This is a lousy time to do that” because of significant federal cuts in aids to states, cities and counties, he said.

Sen. Russell B. Long (D-La.) said that “to tax (bonds) after they’ve been bought is a violation of faith” with investors.

Tax-exempt bonds are issued by states, cities and counties to finance projects from hospitals and schools to shopping centers. Exempting them from taxes makes them more attractive to upper-income investors; in turn, it costs local taxpayers less to finance such projects. Under present law, these bonds are exempt from the regular income tax and from the minimum tax.