Tax Reform and Potential Impacts to Municipal Bonds
“Everything is on the Table”
Following a Republican sweep on election night, attention in DC has turned to the Trump Administrations first 100 days agenda and what Congressional Leaders may be preparing to tackle first. Issues such as immigration and tax pop to the forefront as it seems like government funding will be taken care of prior to the December holidays.
Republican Leadership has projected several main objective to be achieved in the near term, these include:
- Funding for extensive border security initiatives,
- Non-discressionary domestic spending cuts,
- Readdressing the Inflation Reduction Act with the likelihood of rolling back provisions to help pay for other priorities including,
- A full extension of the 2017 Tax Cuts and Jobs Act (TCJA) and additional tax measures.
With vast swaths of the TCJA expiring on December, 31st 2025, it is widely expected that Congress will begin to address the potential “tax cliff” in Quarter 1 of the119th session.
Last week, House Ways and Means Chairman Jason Smith (R-MO) noted that he wants to ensure the bill is “fiscally smart, and everything is on the table” with his Senate counterpart incoming Finance Committee Chair Mike Crapo (R-ID) noting that “everything was in play” when it comes to paying for the bill raising the jeopardy for top tax expenditures such as the tax-exemption for municipal bonds.
With rumors of combining the tax package with an immigration spending bill into a single budget reconciliation package, how likely is tax to be addressed? And most importantly, how do we expect that Congress will pay for the likely TCJA extensions and Trump campaign trail priorities and how likely will tax-writers look into current federal expenditures including the tax-exemption as low hanging fruit?
The tax-exemption for municipal bonds remains top of mind for the BDA heading into 2025. As Congress begins to draft the direction of the expected tax bill, we continue to press Congressional Leaders for support of this key financing tool.
Below we break down what is at stake in 2025, and take a look at how this could potentially impact the tax-exemption and the muni market:
TCJA Expirations
With unified Republican control of Washington, the conversation is no longer will the TCJA be extended, instead it is a discussion of for how many years will the tax-cuts be extended, what else can be done beyond the 2017 law, and is it possible to make these changes permanent?
Before we dig deeper, its important to note which provisions are slated to expire next year.
These include:
- The larger standard deduction,
- Individual tax rates,
- The State and Local Tax Deduction (SALT) cap,
- Expanded Child Tax Credit (CTC), and
- Raised Alternative Minimum Tax (ATM) exemption.
Of note, the elimination of tax-exempt advance refundings was on a permanent basis, as was the lowering of the corporate rate.
The Congressional Budget Office has estimated that extending all expirations for a decade would cost roughly $4.7 trillion dollars, a steep figure in a time of ballooning federal debt and deficits.
Trump Campaign Promises
President-Elect Trump Campaigned on the promise to extend or make permanent some key elements of 2017’s Tax Cuts and Jobs Act, the key legislative victory of his first term. He also touted a plethora of additional tax topics he would like to implement.
Some key campaign promises include:
- 100% bonus depreciation
- Doubling of the the state and local tax deduction,
- Research and development deductions,
- A 15-percent corporate tax rate for domestic manufacturers,
- No tax on tips,
- No tax on Social Security benefits,
- No tax on overtime pay, and
- Making car loan interest deductible, among others.
While there have been no official estimates produced for these additional items, 3rd party scorers have estimated that they will cost the federal government roughly $3.5 trillion dollars. Combined with the full 2017 TCJA extensions, this would brining the cost to over $8 trillion in a 10 year budget window.
President-Elect Trump has also touted vast tariffs ranging from 10%-200% to help offset these broad tax-cuts and changes, but it is highly unlikely Congress would be able to pass major tariffs with such tight margins in both Houses.
Pay-fors: How Worried Are Muni Advocates
As noted, President-Elect Trump has promoted vast tariffs as a way to offset costs of the tax-exentions. However, it is most likely he will work to implement most tariffs through executive action, rendering it likely useless as a pay-for in any budget reconciliation package due to strict parliamentarian rules.
This leaves a potentially $8 trillion dollar budget hole for Congress to grapple with for a full tax package.
We fully expect Congress to look at top tax-exependitures as low-hanging fruit to help offset the costs of the TCJA extensions, with the tax-exemption remaining in the top 15 of these expenditures. The list also includes key provisions such as the mortgage interest deduction and the charitable deduction.
It can also be expected that tax-writers will look at individual financing provisions related to higher education, hospitals, and non-profits bringing certain classes of PAB’s into focus such as 501c-3 bonds.
While the overall price tag of such bonds is low, 2017 proved with the elimination of tax-exempt advance refundings that if a tool is disliked, it will be eliminated no matter the benefit to the budget.
Bottom line: Munis and many other tax-exempendatures will be discussed for the chopping block in 2025.
Industry Advocacy
The BDA, and utilizing our MBFA coalition of municipal market leadership, continues to lead industry effort’s promoting municipal bonds on Capitol Hill. The BDA alongside the Public Finance Network (PFN), led by the Government Finance Officers Association, has spent considerable time and effort to grow bipartisan support of the tax-exemption, protection, and expansion of private activity bonds, as well serval additional municipal provisions including the restoration of tax-exempt advance refundings, and the reintroduction of legislation to raise the bank qualified limit.
A main pillar of support is the House Municipal Finance Caucus led by Reps. Terri Sewell (D-AL) and Rudy Yakym (R-IN). The Caucus, founded in 2016 by Congressman Ruppersberger, who is retiring at year end, serves as a forum for discussing issues related to funding for state and local government initiatives. Key issues include protecting the tax-exempt status of municipal debt, ensuring a robust market for municipal securities, and understanding the impact of financial regulations on municipal finance.
The BDA continues its educational efforts in both the House and the Senate with eyes squarely focused on 2025 when portions of the 2017 Tax Cuts and Jobs Act expire. This will including quarterly fly-in’s in 2025 beginning shortly after the new Congress is sworn in.
We will continue to provde updates as the fuller picture begins to take focus on Capitol Hill.
