December 4, 1990
TO: TAX COMMITTEE NO. 30-90
SUBCOMMITTEE ON ADVERTISING
RE: TAXABLE-EQUIVALENT YIELDS FOR TAX-EXEMPT FUNDS
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As you may know, the Omnibus Budget Reconciliation Act of
1990 ("OBRA 90") modified the individual income tax rate
structure in several respects. Specifically, Congress eliminated
the 33 percent marginal income tax rate (the so-called "bubble")
and provided: 1) a new maximum marginal income tax rate of 31
percent; 2) a new phase-out of personal exemptions for taxpayers
with adjusted gross income exceeding certain amounts; and 3) an
overall limitation on itemized deductions for taxpayers with
adjusted gross income exceeding $100,000. One effect of these
changes has been to create different effective marginal federal
income tax rates for different investors based upon their
particular circumstances, i.e., their income levels, the amount
of their itemized deductions and the number of dependents they
have.
Since OBRA 90 was enacted, the Institute has received calls
from several members regarding the appropriate marginal federal
income tax rate to be used in calculating the taxable-equivalent
yield for advertisements of tax-exempt funds. The two rates that
have been suggested as possibilities are 31 percent, the new
highest marginal rate, and 31.9 percent, the 31 percent rate plus
the increment attributable to the overall limitation on itemized
deductions.
In response to these inquiries, the Institute conducted an
informal survey of members to determine which marginal tax rate
they believed should be used in tax-exempt fund advertisements.
Most members contacted stated that the appropriate marginal
federal income tax rate for determining taxable-equivalent yields
is 31 percent. These members stated that since all investors in
tax-exempt funds might not be subject to the overall limitation
on itemized deductions, and since there are some limits on the
overall limitation, a 31 percent rate would be more appropriate
(although it will produce slightly lower yields than a 31.9
percent rate). A few members expressed a preference for use of a
31.9 percent rate. However, these members expressed a willing-
ness to use a 31 percent rate, in order to avoid shareholder
confusion, if other funds did so.
We will keep you informed of developments.
Craig S. Tyle
Associate General Counsel
Keith D. Lawson
Associate General Counsel