Dear Mr. Berko:

Dear R.S.:

Our government really needs money to fund our entitlement programs, such as food stamps, Medicaid, Supplemental Security Income, lower-income housing assistance, earned income tax credits, Stafford loans, Pell grants, bilingual education, low-rent public housing, general medical assistance, cellphone entitlements, foster care, school lunch programs, Head Start, training for disadvantaged youths and adults, low-income energy assistance, rural housing loans, summer youth employment, maternal child health, Job Corps, child-care block grants, school breakfast, at-risk child care and other programs to assist unfortunate Americans.

Sens. Ron Wyden, D-Ore., and Dan Coats, R-Ind., recognize that these important entitlement programs account for 47 percent of our annual budget. So in early April, they proposed a bill to prevent municipal borrowers from issuing tax-exempt bonds. Wyden and Coats recognize that eliminating these tax breaks for wealthy investors would help plug the federal budget deficit.

This proposal is gaining traction and appears to have broad support among Democrats as well as Republicans. The Wyden-Coats proposal would make all interest on state and local debt taxable after 2011. This proposal is supported by President Obama’s National Commission on Fiscal Responsibility and Reform (NCFRR). Support for this bill is based upon a study by the Congressional Research Service that finds that tax exemptions for state and local borrowings would cost the government $162 billion in revenues between 2010 and 2014.

The proposal will take months to get through the legislative process. But not to worry about your portfolio. A very knowledgeable legislative aide told me that the proposal will grandfather in the tax exemptions for bonds issued prior to 2011.

If you have any new bonds in your portfolio that were issued this year, they may be taxable.

It’s a wonderful Golconda for the honorable lobbyists who roll suitcases through the halls of Congress stuffed with candy as they try to derail this proposal. But if they fail and the bill passes, the tax-free bonds in your portfolio will rise hugely in value. If the bill doesn’t pass this year or next, I’m certain that others will carry the torch until it becomes law.

Though the municipal market is in a funk, you might consider looking at some of the Illinois municipal bonds I mentioned a few months ago, as well as bonds from other states. If you are not comfortable owning individual issues, consider the many tax-free ETFs or no-load municipal bond funds. They will appreciate quite nicely, too.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or email him at malber@adelphia.net. ©2011 Creators.com