There’s also the non-zero possibility that a budget crunch will cause the federal government to rethink the tax deductibility of bond interest (a 1988 Supreme Court ruling says that they can). Bill Walsh, co-founder and president of municipal bond specialist firm Hennion and Walsh, doesn’t see this happening any time soon. He believes that a change in tax law “is certainly a possibility.” But even if politicians are able to surmount the considerable political pressure against raising taxes, Walsh thinks this won’t be a big risk for muni owners. “I think if anything happens they’ll change the future exemption and not the current exemption.” Grandfathering the tax exemption of current muni owners would increase the value of existing munis, which is hardly a risk.

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