The Tax Reform Act of 1986 eliminated the cost-of-carry deduction for banks buying municipal bonds, with the exception of small issuers, those municipalities that reasonably expected not to sell more than $10 million worth in a given year. Banks could deduct 80 percent of the interest cost for carrying those bonds. Such bonds have typically comprised almost half of the number of issues sold annually, but less than 10 percent of the total dollar volume.
Under terms of the American Recovery and Reinvestment Act of 2009, the small-issue exemption was increased to $30 million. There were calls for its extension, but this provision expired as scheduled, at the end of 2010.
Bank-qualified issues typically make up around 50 percent ...