Taxable Talk

Municipal bonds are part of many investors portfolios. They're tax advantaged, as most municipal bonds are tax free. Of course, the issuing agency must follow some rules: the bonds must be for an essential government function.

The Cabazon Band of Mission Indians operates a very successful casino on Interstate 10 just east of Palm Springs, in Indio, California. They used municipal bonds to help fund a new hotel and a convention center.

And then the IRS stepped in. The IRS usually rubber-stamps the tax-exempt status of municipal bonds. However, the IRS has tentatively ruled that these bonds are, "private activity bonds because [the East Valley Transportation Authority] and the Cabazon Band of Mission Indians should not be treated as states where they have not issued their obligations for essential governmental functions." Reuters has the full details here.

Unless the IRS and the Cabazon Indians can come to an agreement within thirty days, some investors may have a rude surprise. And this is the second time this issue has come up--back in 2005 the IRS notified the Cabazon Indians and California that they would be investigating this issue.

Come January, the Democrats will be in control of the House and likely the Senate for the first time in over a decade. What will that mean for taxes?

First, forget estate tax reform. I can't see it passing, unless it's something like a $2 million exemption with 45% rates above that. Second, forget any other major changes in the Tax Code. The Democrats have said they'd like to see new programs (that cost money), but unless tax revenues increase, those aren't likely to happen. I see two years of gridlock, which isn't necessarily bad.

On the state level, Californians rejected all of the direct tax increase initiatives: Propositions 85 - 90 all failed. Notably, Proposition 88, which had a title that included the word "tax" failed by the largest percentage: 76.9% voted against it. The bond measures, Propositions 1A-1E and 84, did pass (though Proposition 84 might not be implemented as Proposition 1E passed with a larger percentage). We'll be paying for those for the next 30 years.

On the local level, Measure M's renewal passed, with 68.5% voting for it (a 2/3 yes vote was required), so sales taxes in Orange County will be 7.75% for the next 33 years.

Finally, the last of the ballot measures on the statewide ballot. Proposition 90 looks at government "takings" -- when property is condemned and utilized. This measure looks to reverse the Kelo decision in California.

Opponents of this measure claim that it goes too far. They believe that the measure would not only impact eminent domain abuse, but it would also impact consumer protection laws, telemarketing laws, and other statutes. Proponents of Proposition 90 state that the opponents are wrong. All it stops is government takings, from eminent domain abuse and similar measures.

The measure does impact takings that would cause a "significant economic loss" to the owner of the seized property, according to the Legislative Analyst. How far it really goes will be up to the voters (if it's approved), and the Courts when it's interpreted.