Omission: Biden ignores tax-exempt bonds in annual Treasury book, again

It's déjà vu all over again for the municipal bond market. For the second year in a row, the Treasury Department's so-called Green Book, which contains the Biden administration's tax policy initiatives and proposals, fails to mention tax-exempt municipal bonds.

It's an absence that's puzzling given that President Joe Biden has made infrastructure a centerpiece of his administration and campaign for reelection.

"The symbolism of the Green Book is always important in terms of an administration's priorities," said Edwin Oswald, a former Treasury official who is a tax partner at Orrick, Herrington & Sutcliffe LLP specializing in tax-exempt bonds. "It's difficult to know why an administration that otherwise is strongly behind state and local infrastructure financing doesn't have anything in the Green Book on the bonds which are the backbone of how infrastructure gets built."

Orrick, Herrington & Sutcliffe

Last year was the first time in recent memory that the Green Book did not mention municipal bonds. Biden unveiled his fiscal 2025 budget on March 11. Treasury shortly afterward released the General Explanations of the Administration's Fiscal Year 2025 Revenue Proposals, which provides details on the revenue and tax policy proposals.

Part of the problem is the lack of a muni expert in Treasury's Office of Tax Policy, said Emily Brock, federal liaison for the Government Finance Officers Association.

"This Treasury [administration] never even had a John Cross," Brock said, referring to the former Office of Tax Policy associate tax legislative counsel John Cross III, a municipal market expert who retired in 2019 before Biden took office.

"So this Treasury has recent amnesia and we've got to really put the push on them to recall and understand that we need specialization in tax exempts in the Office of Tax Policy in a way that allows for us to have productive conversations."

Ongoing issues like the simmering debate over extraordinary redemption provisions in Build America Bonds underscore the importance of having muni experts at Treasury who can offer guidance, Brock added. Confusion over direct-pay tax credits in the Inflation Reduction Act also may need additional attention.

"GFOA and others have been consistently making the push but we're nearing the time where I think, especially with the coming election, we need as a market to try to make sure Treasury understands that the vacancy is noticed," she said.

While the two-year snub has nagged at the muni market, a similar oversight in next year's Green Book could take on more significance. That's because many of the Tax Cuts and Jobs Act provisions will expire by December 2025, and tax code issues "will be front and center" at Congress, Oswald said.

"This should provide a forum for supporters of tax-exempt bonds to make their case for the reinstatement of advance refunding bonds and related matters," he said.

Negotiations over the tax code and the need to offset the cost of extending provisions could render the tax-exemption newly vulnerable, some market participants have warned.

"Next year there's going to be a massive tax approach," Brock said. Important issues like state and local tax deductions, tax-exempt advance refunding, bank-qualified debt and the tax-exemption itself may all be in play.

"If we don't have a tax specialist and reference to the tax-exemption in the Green Book, it's going to be hard to have those conversations with Treasury and scoring; it has significant impact," Brock said.