Tax exemption, Medicaid funding are top muni pros' concerns

The Bond Buyer's 2026 Policy Pulse Survey

How is the current federal policy attitude hitting the muni industry?

Key takeaway: U.S. residents and municipalities are two cohorts being hit the hardest by current federal policy.

By and large, the federal policy environment is a crushing presence on much of the U.S. population and by extension, the municipal finance industry.

Roughly 75% of respondents said policy has a somewhat to very negative impact on U.S. residents, versus 9% who said somewhat positive and 17% who responded with neutral.

Municipalities were the group most negatively impacted by the environment according to 88% of respondents. Only 6% responded with a positive impact and another 6% were neutral.

When asked about their own organization, 27% responded positively about the policy environment, 30% responded negatively and 43% were neutral.

For the municipal finance industry, 55% said the current policy environment is negatively impacting the sector, 16% said positively impacting and 29% were neutral.

As Fed Chair Jerome Powell's term as chair expires this month, with likely successor Kevin Warsh, muni professionals are keeping a close eye on Fed policy going forward.

José Torres, senior economist at Interactive Brokers, told The Bond Buyer that market expectations for Warsh are that he takes "a dovish position" after formally stepping into the chairman position.

During his previous tenure on the Board of Governors, Warsh "essentially blamed the institution's policy errors for contributing to price pressures that have exceeded the organization's target for about five years and counting since the pandemic's aftermath," Torres said. "Is it reasonable to believe that, with accelerating cost pressures driven mainly by soaring crude oil prices, tariff passthroughs and robust consumer demand, a loosening of financial conditions is warranted as leadership transitions?"

The federal policies muni pros are keeping an eye on

Key takeaway: Last year's tumult over the tax exemption surrounding municipal bonds remains a top worry for muni pros in 2026.

Professionals still settling from last year's fight over the tax exemption remain worried that another battle could occur to some degree in 2026.

Overall, the tax-exempt status afforded to municipal bonds and general tax policy is the top trend being tracked by 81% of respondents. Closed behind was infrastructure funding at 78%, shifts in funding responsibilities to state and local governments at 72% and municipal disclosure policy at 66%.

Tax-exemption was the top matter being monitored by sell side professionals (86%) and those working elsewhere in the municipal finance industry (73%). For buy side respondents (96%) and issuers (79%), infrastructure funding took the spotlight.

With the pending retirement of Rep. Sam Graves, R-Mo., chairman of the House Transportation and Infrastructure Committee and an influential tax exemption advocate, fresh worries arise from industry professionals still recovering from last year's fight.

A current effort to advance a second reconciliation bill revives the defense of the tax exemption, which according to Brett Bolton, vice president of federal legislative & regulatory policy for Bond Dealers of America, "will always be on the table."

Which policy plays will hurt the industry the most?

Key takeaway: The current administration's stances on changes to Medicaid funding, funding responsibilities and trade/tariff policy could negatively hit the market.

Medicaid funding volatility, ebbs and flows in funding responsibilities and tariff policy are all top-of-mind policy worries for muni pros.

Changes to Medicaid funding and healthcare reimbursement (minus-77) was the most damaging policy matter for U.S. residents, followed by shifts in funding responsibility (minus-73) and trade and tariff policy (minus-71). The closest to a positive impact was tax exemption on munis (minus-4).

Understandably, changes in funding responsibility (minus-79) was the most negative policy matter for municipalities, outpacing changes to Medicaid funding (minus-70) and use of K-12 school vouchers (minus-67). The most positive impact was tax exemption on munis (plus-28).

Availability/reliability of government data (minus-55) was the policy matter most damaging for respondents' organizations, followed by trade and tariff policy (minus-52) and Federal Reserve independence (minus-24). The most positive impact was regulatory rollbacks (plus-22).

For the industry as a whole, trade and tariff policy (minus-65) was the most damaging policy matter. Close behind were shifts in funding responsibilities (minus-57) and changes to Medicaid funding (minus-51). The most positive impact was tax exemption on munis and general tax policy (plus-32).

The burden placed on states can be seen in shifts at the Federal Emergency Management Agency, which industry experts say can create disproportionate funding disbursements for future disaster events.

Changes to Medicaid brought on by the One Big Beautiful Bill Act are expected to create greater pressure on state governments to "close the coverage and financial gaps that emerge as implementation occurs while addressing the knock-on effects of federal policy changes, such as the expiration of enhanced premium tax credits," according to experts with KBRA.

"KBRA believes changes involving work requirements, provider taxes, state-directed payments, and eligibility redeterminations may have the largest impacts for states due to their combined fiscal and administrative implications," the report added.