Many investors seeking to avoid the pain caused by caps on deductions for state and local taxes are putting money in muni funds. But is that the best decision? Reporting by Heather Gillers and Richard Rubin at The Wall Street Journal suggests that it may not be. They write:
To get higher yields that are tax-free in California, some investors are pushing deeper into riskier municipal debt such as bonds issued for charter schools, nursing homes and real-estate development projects. Governments confer their tax-exempt borrowing power on those entities because they are seen to spur economic development or have some other public benefit.
“When we bring a high-yield bond issue to market, we receive a lot of demand from a broad swath of buyers,” said Sara Brown, head of the California general government group at Stifel, a municipal-bond underwriter.
Advisers cautioned that investors sometimes get too enamored of the tax savings from buying in-state bonds and ignore some of the downsides. Those include lower yields than corporate debt and the danger of concentrating too much risk in one state. That is a particular concern for investors in New Jersey, where burdensome pension obligations have pushed the state credit rating to among the lowest of any state.
Read more here.