WASHINGTON - Republican presidential candidate Donald Trump released his tax reform proposal on Monday and grabbed the attention of municipal market participants because it would lower tax rates and reduce or eliminate tax deductions and loopholes for the rich.
While it's unclear exactly how the municipal bond tax exemption would be treated under Trump's plan, as is the case with other candidates' proposals, "the industry needs to watch it carefully and ask questions," said Bill Daly, director of governmental affairs for the National Association of Bond Lawyers.
Under Trump's proposal, there would be four individual income tax rates: 0%, 10%, 20% and 25%. The current tax code has seven individual tax brackets, with the highest at 39.6%.
"With this huge reduction in rates, many of the current exemptions and deductions will become unnecessary or redundant," the Trump campaign stated in an outline of the plan. "Those within the 10% bracket will keep all or most of their current deductions. Those within the 20% bracket will keep more than half of their current deductions. Those within the 25% bracket will keep fewer deductions."
Trump's proposal would also lower the corporate tax rate to 15% and reduce or eliminate some "corporate loopholes that cater to special interests, as well as deductions made unnecessary or redundant by the new lower tax rate on corporations and business income." The alternative minimum tax, to which private-activity bonds are generally subject, would be eliminated. Absent other changes, that would be good for PABs.
The campaign did not immediately respond to The Bond Buyer's inquiry about how the tax-reform plan would specifically treat the muni exemption.
A tax lobbyist who did not want to be named said that while it's not clear if the muni exemption would be among the tax loopholes closed for the wealthy under Trump's plan, the exemption is not explicitly excluded. Munis "aren't out of the woods" in Trump's proposal and stakeholders need to make their case for preserving the exemption, he said.
Micah Green, co-chair of Steptoe & Johnson's government affairs & public policy group, said that anyone who cares about munis should look for more details about curbing tax preferences, particularly income exclusions and their value. The muni tax exemption is technically an exclusion of muni interest from income.
Green said Trump's plan "sounds a lot like the 28% cap" that has been proposed by President Obama but could even be "more severe." The plan seems to focus on limiting the value of tax preferences more quickly than under current law, and if the muni exemption is affected, the after-tax yield of munis and state and local governments' borrowing costs could also be affected, he said. Trump's plan calls for "starting by steepening the curve of the personal exemption phaseout and Pease Limitation on itemized deductions."
Mike Nicholas, chief executive officer for the Bond Dealers of America, said his group "will review all tax plans by all candidates for federal office to ensure the tax exemption for municipal bonds, which benefits middle class investors, retirement age investors, and thousands of us communities, is preserved."
Howard Gleckman, a senior fellow at the Urban Institute, also pointed out that "big cuts in rates are bad for munis." The lower a person's tax rate is, the less reason he or she has to buy tax-exempt bonds.
Gleckman called Trump's proposal a "standard Republican tax-reform plan" that would lower rates and broaden the base.
