Muni market spotlight: Muni bonds and tax reform

Will states and localities have to choose between the lesser of two evils?

Welcome back, readers. Amid all the chaos and uncertainty created by President Trump's onslaught of executive actions this past month, Congress has been preparing for its own policy action that could have an even more lasting fiscal impact on states and localities: Tax Reform 2.0.

The 2017 Tax Cuts and Jobs Act (TCJA) expires at the end of this year and many people have been worried about what threats to municipal bonds they'll have to ward off this time. Three-quarters of the nation’s public infrastructure is paid for by states and localities—mainly through financing in the municipal bond market. Most types of municipal bonds are "tax exempt," meaning that investors who buy the bonds earn interest on them tax free. The exemption allows governments to finance roads, bridges, schools, hospitals and water systems, among other things, at lower borrowing costs.

"Simply put, bonds are the foundation of development finance," wrote the Council of Development Finance Agencies' (CDFA) Toby Rittner in his latest outreach email. In fact, he added, CDFA research shows that, without tax exempt bonds, "communities would face an increase in capital cost of 35-45%....[which] would devastate American communities and set economic development efforts back decades."

Even so, federal lawmakers have repeatedly eyed modifications or outright eliminations of this exemption for years as they sought to find "pay-fors" to offset the cost of their policy proposals. With additional tax cuts on President Trump's wish list, it's unclear how far GOP leaders in Congress will go to fund them.

In this muni market spotlight newsletter, paid subscribers will read about:

• Two likely attacks on the tax exemption

• The potential muni market impacts of other policies up for debate

• Data that illustrates the economic importance of muni bonds

The municipal bond tax exemption: Two likely targets