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Tax Hikes Foster Growth of Tax-Exempt Investments

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TAXES are going up in many parts of the United States. And the increase in taxes - both actual or merely anticipated, such as at the federal level - is causing scores of individuals to shelter their investments by shifting assets into tax-free mutual funds. Tax-free municipal bond funds and tax-free money market funds have been ``one of the largest categories of mutual funds attracting new monies in recent years,'' says Erick Kanter, a spokesman for the Investment Company Institute, in Washington. ``Because of new taxes in many areas, we can expect that pattern to continue, if not increase.'' The ICI is the main national trade association for the mutual fund industry.

``Our tax-exempt funds have grown by about $2 billion for the first half of this year,'' says Monte Gordon, an official of the Dreyfus Corporation. Most of that money, Mr. Gordon says, represents ``new investments,'' not money shifted from other mutual funds. In the first half of the year, he notes, tax-exempt funds have increased by about the same amount as for all of 1989, clear indication that there has been renewed attention to tax-exempt funds. Currently, Dreyfus has about $18 billion in tax-exempt funds.

In recent months, tax increases have been been enacted or initiated in such already high-tax states as New York, New Jersey, and Massachusetts. In Connecticut, there is talk about introducing a state income levy; and tax talk is under way in California. And, of course, at the federal level, President Bush has indicated his willingness to accept tax increases as part of a bipartisan budget agreement.

Tax-free mutual bond funds can be found at both the national and state level. The bond funds buy long-term debt obligations issued by state and local governments. The tax-free money-market funds buy short-term obligations issued by similar state or local government institutions.

Assets in all tax-exempt municipal bond funds were $111 billion at the end of May, a little more than one-tenth of all mutual funds. This category is outpacing all others types of mutual funds, according to the ICI. Total assets of all mutual funds were $1.03 trillion at the end of May.

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