March 16 (Bloomberg) -- If you want to keep up with the Joneses, you will have to buy municipal bonds.
The evidence is contained in the latest edition of the Internal Revenue Service's Statistics of Income Bulletin, now available on the IRS's Web site.
More rich people claimed tax-exempt interest in 2005, the latest year for which preliminary data is available, and they claimed more of it.
Of the 134.5 million income tax returns filed by individuals in 2005, 4.5 million reported receiving tax-exempt interest, totaling $54 billion. That's up from 2004's 4.4 million figure.
Of the 3 million taxpayers with adjusted gross incomes (salaries and wages) of $200,000 or more, 974,410, or 32 percent, reported $30 billion in tax-exempt interest.
That's up, and significantly. In 2004, 863,388 taxpayers, or about 28 percent of the 3 million at the top of the food chain, reported receiving $24.8 billion in tax-free interest.
Thinking about it another way, the top earners got almost half of all tax-exempt interest in 2004. They received 56 percent of all tax-free interest in 2005.
Muni bonds, long the stealth investment, are getting ready for the spotlight. This is going to translate into all kinds of good things for the states and municipalities that sell bonds and the securities firms that in turn offer those bonds to investors.
Frank Admission
Why is that? There's more demand for municipal bonds and the tax-free income they generate. More demand means that states and municipalities won't have to pay as much to borrow money in the bond market, compared with other borrowers.
As for the securities firms that sell municipal bonds -- well, how far can we go with this? Are municipal bonds about to go mainstream? How long will it be before ``Entertainment Tonight'' carries a feature on celebrity interest in munis?
Perhaps a sign of things to come appeared in the New York Times Sunday Magazine on Feb. 25. There, Suze Orman, the celebrity financial adviser and author, said she had $1 million in the stock market and the remainder of her fortune, at least what wasn't in real estate, invested in insured, zero-coupon municipal bonds.
That was quite an admission, in an article in which Orman also disclosed that she has been living happily with another woman for the past seven years.
I almost think her acknowledgement about owning munis was the bigger deal.
Who's next? Come on, I know you're out there.
Equity Focus
More taxpayers with adjusted gross incomes of $100,000 to $200,000 also said they received tax-exempt interest in 2005. In 2004, 955,514 taxpayers in this group claimed tax-free interest of $9.3 billion. In 2005, slightly more than 1 million reported around the same amount.
It's still a stock market world, of course. Of those 3 million taxpayers who reported adjusted gross incomes of $200,000 and more in salary and wages in 2005, 2.8 million reported receiving ordinary dividends, totaling $80 billion.
Even this little statistic is good news for those who sell muni bonds. What it shows is that there are still a lot of taxpayers in that top bracket who now invest in stocks who also should be buying munis. The old axiom is that investors don't buy bonds to get rich. They buy bonds to stay rich.
Big Year
All indications point to a very big year in municipals, in many ways.
The latest data from the IRS is from tax year 2005. There's no sign that demand for munis has slackened. In February, daily trading in municipals reached a record high of $41 billion, according to the Municipal Securities Rulemaking Board.
Then there's volume. In January and February, states and localities sold $62.3 billion in bonds, an increase of 37 percent over the first two months of last year, according to the Bond Buyer newspaper.
During this period, yields on the newspaper's 20-General Bond Index rose from 4.15 percent to 4.32 percent at the end of January, and since then they have fallen to 4.13 percent. That 4.13 percent is 10 basis points away from the recent record low of 4.03 percent reached in December.
The demand is there, even in the face of yields challenging lows not seen since the 1960s. It's still early, but analysts say there's a good chance 2007 will shatter the record for bond sales -- $408 billion -- set in 2005.
I don't see very much stopping this bond sale juggernaut, not credit concerns, and not worries about the big federal investigation into how the reinvestment-of-proceeds business works. Next stop: Ellen. Next stop: Oprah.
(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)
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