NEW ORLEANS - November's elections could create an opening for tax reform, one keen observer says.
Anyone who wins the presidency is likely to want to do some kind of tax reform, Robert Kyle, a partner at Hogan Lovells, said Thursday on a panel at the National Municipal Bond Summit. That, combined with political will in Congress, could lead to something.
"You're likely to have somebody who wants to do something on taxes," he said. "I think the odds are higher than you might think."
The panel discussion focused on how the presidential and congressional elections and subsequent new leadership could impact tax policy and spending attitudes that affect the muni market.
"Tax reform has not exactly been front and center," Kyle said, noting that even though every presidential candidate has floated a tax plan, the discussion on the campaign trail has been largely dominated by immigration and foreign policy questions.
Kyle said that members of Congress are pushing strongly for a tax overhaul, led by House Speaker Paul Ryan, R-Wis. As former chairman of the House Ways and Means Committee, Kyle said, Ryan is probably the most tax-knowledgeable speaker in decades.
"You've really never had a speaker who knew as much about this," Kyle said.
A major anxiety for muni market participants is how the tax exemption for municipal bond interest might be treated under a new tax code. The industry has been largely united in opposing any curtailing of the exemption, which some critics have said disproportionately benefits the wealthy but which issuers say is key to their ability to drive demand for their bonds and finance public projects affordably.
Chris Mier, a managing director at Loop Capital Markets, said the U.S. Treasury has had a somewhat "adversarial" view of the tax exemption since the 1970s.
But Kyle said policymakers who support reducing or eliminating the tax exemption are merely trying to solve a "math problem": replacing the roughly $500 billion in lost revenues caused under most tax reform scenarios. Kyle said the same politicians who pound the drum for more infrastructure spending may also be open to curtailing the muni exemption for the sake of tax reform.
"I think the political solution to this is to put that infrastructure hat on very firmly," he said, adding that mayors and other local leaders are the best voices to achieve that aim, rather than public finance practitioners.
And while both men said they could envision some limited infrastructure spending happening via executive order or by consent of a regulator such as the Environmental Protection Agency, the likelihood of robust infrastructure spending seems small.
"When you put on the infrastructure hat, most politicians are in favor of that, both Democrats and Republicans," Kyle said, explaining that many observers believe the currently Republican Senate could narrowly flip to Democrat control, with the House probably staying Republican. With a Democrat in the White House, Republicans could be inclined to fight any big spending programs.
"There's not much likely to be coming out of Washington in terms of real, substantive transportation," Mier said. "I just don't think you're going to see it."
