Munis and tax reform: Tax act implications for individual investors

US tax reform, which was recently signed into law, has the potential to affect the municipal bond market in several ways. However, as Senior Portfolio Manager Greg Gizzi discusses in this brief video, the effects of the new tax act on individual municipal bond investors are relatively benign. Nonetheless, he notes the potential implications of two provisions in the tax act, the state and local tax (SALT) deduction and the cap on mortgage interest.

Gregory A. Gizzi

Senior Portfolio Manager

The tax act for individual investors was relatively benign. There are some short-term positive implications and some medium- or longer-term concerns that the market might have from an issuer’s perspective, and we could in fact see some structural changes to the marketplace. Let’s look at rates. The individual top tax rate falling from 39.6 to 37%, in our opinion, does not create a substantial change to taxable equivalent yields that could compromise demand from individuals.

Impacts of the SALT and mortgage cap deduction provisions

The SALT and the mortgage cap deduction does play a role in the marketplace, particularly in the short term. We feel as individual investors visit their accountants or do their taxes and recognize what those, losing those deductions, what that means for their individual tax status, there could be an increase in demand for in-state paper in those high-tax jurisdictions — states like California, New York, Connecticut, Massachusetts, Minnesota, to name a few. The SALT and mortgage deduction provision also has implications for issuers. Considering the fact that state and local issuers, particularly local issuers, derive most of their revenue from property tax revenues — if in fact lower deductibility for SALT and mortgage tax winds up in lower property values — assessed valuations will fall and tax revenues will fall, something that could play a role potentially, in the medium or long term to the credit-worthiness of some of these entities.

Outlook for AMT spreads

From an individual perspective, exemptions and phase out levels were changed. Ultimately, what is means is fewer investors will be subject to AMT, and so we saw AMT spreads tighten. We do think that the market will maintain those spreads, and then it will take time as individual investors go to their accountants or do their own taxes and figure out what the, what their, current status is. We do believe that AMT spreads will continue to narrow in the future.

The views expressed represent the Managers’ assessment of the market environment as of January 2018 and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice.

Past performance does not guarantee future results.

Investing involves risk, including the possible loss of principal.

SALT refers to the state and local tax deduction.

AMT refers to the Alternative Minimum Tax.

Fixed income securities and bond funds can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions.

Bond funds may also be subject to prepayment risk, the risk that the principal of a fixed income security that is held by the Fund may be prepaid prior to maturity, at the time when interest rates are lower than what the bond was paying. A portfolio may then have to reinvest that money at a lower interest rate.

High yielding, non-investment-grade bonds (junk bonds) involve higher risk than investment grade bonds.

Funds that invest primarily in one state may be more susceptible to the economic, regulatory, and other factors of that state than funds that invest more broadly.

Substantially all dividend income derived from tax-free funds is exempt from federal income tax. Some income may be subject to state or local taxes and/or the federal alternative minimum tax (AMT) that applies to certain investors. Capital gains, if any, are taxable.

Other than Macquarie Bank Limited (MBL), none of the entities noted are authorised deposit-taking institutions for the purposes of the Banking Act 1959 (Commonwealth of Australia). The obligations of these entities do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that entity, unless noted otherwise.

The Funds are distributed by Delaware Distributors, L.P., an affiliate of Macquarie Investment Management Business Trust (MIMBT), Macquarie Management Holdings, Inc., and Macquarie Group Limited. Macquarie Investment Management (MIM), a member of Macquarie Group, refers to the companies comprising the asset management division of Macquarie Group Limited and its subsidiaries and affiliates worldwide.

© 2018 Macquarie Management Holdings, Inc.

(428161) 02/18


Fixed income securities and bond funds can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions that hinder an issuer’s ability to make interest and principal payments on its debt.

The views expressed represent the Manager's assessment of the market environment as of January 2018, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager's views.


Carefully consider the Funds' investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Funds' prospectuses and their summary prospectuses, which may be obtained by visiting delawarefunds.com/literature or calling 800 523-1918. Investors should read the prospectus and the summary prospectus carefully before investing.

IMPORTANT RISK CONSIDERATIONS

Investing involves risk, including the possible loss of principal.

Past performance does not guarantee future results.

Top insights

ADVISORS

Gain access to additional commentaries, presentations, and multimedia when you register for our financial advisors website.

Register today

Subscribe

Subscribe to hear from our portfolio managers and analysts on trending topics

I'm interested in hearing from:
Or select:

Subscribe to Insights

Thank you for your subscription!

Consult your financial advisor

Your financial advisor can help you decide what mutual fund mix is appropriate for you in light of your goals, time horizon, and attitude toward risk.