TAX INTERST FROM BONDS?

IN A LANDMARK DECISION, THE SUPREME COURT HAS RULED THAT CONGRESS IS FREE TO TAX THE INTEREST ON STATE AND LOCAL GOVERNMENT BONDS, WHICH NOW ARE EXEMPT FROM FEDERAL TAXATION.

THE IMPORTANT RULING WILL HAVE NO IMMEDIATE EFFECT, SINCE CONGRESS IS NOT INCLINED TO CHANGE THE STATUS OF SO-CALLED MUNICIPAL BONDS, WHICH STATES AND LOCALITIES SELL TO FINANCE SCHOOLS, HIGHWAYS, AND OTHER NEEDS.

AFTER THE PRESIDENTIAL ELECTION, HOWEVER, A NEW ADMINISTRATION AND CONGRESS, DESPERATE FOR REVENUES TO SHRINK THE BUDGET DEFICIT, COULD LOOK TO MUNICIPAL BONDS, WHICH ARE WIDELY SEEN AS A TAX HAVEN FOR THE WEALTHY.

TAX-FREE BONDS ARE POPULAR WITH STATE AND LOCAL OFFICIALS BECAUSE THEY PERMIT THEM TO BORROW AT RATES 25 TO 35 PECENT LOWER THAN TAXABLE BONDS. SOME 50,000 LOCALITIES HAVE $715 BILLION IN TAX-EXEMPT SECURITIES.

THOSE BONDS' TAX-FREE STATUS IS HARDLY IN JEOPARDY. IF CONGRESS EVER GETS AROUND TO TAXING MUNICIPALS, IT UNDOUBTEDLY WILL AIM AT NEW ISSUES AND PROTECT THE PRIVILEGED TREATMENT OF EXISTING BONDS.

SOME ECONOMISTS SAY MUNICIPAL BONDS LACK JUSTIFICATION. THEY CONTEND THAT THE FEDERAL GOVERNMENT LOSES MORE REVENUE THROUGH THE TAX EXEMPTION THAN THE ISSUERS SAVE IN BORROWING. THEY ADD THAT BY ELIMINATING TAX-EXEMPTS, WASHINGTON WOULD GAIN ENOUGH REVENUE TO SUBSIDIZE LOCALITIES' HIGHER INTEREST COSTS.

THE PHILOSOPHICAL PROBLEM WITH TAX-FREE BONDS IS THAT THEY PERMIT PEOPLE WHO CAN MOST AFFORD TO PAY TAXES TO AVOID THEM.