How presidential tax policy will affect municipal bond market
No matter who wins the presidency on Nov. 3, at least some of the tax changes sought by the municipal bond industry are likely to be embedded into infrastructure legislation to kick-start the economy rather than tax legislation.
Former Vice President Joe Biden would presumably support the public finance measures already outlined by House Democrats in their stalled Moving America Forward Act while President Trump has not weighed in on the specifics.
Reinstatement of tax-exempt advance refunding, creation of a new series of direct-pay bonds and increased limits for small borrowers to use bank-qualified bonds are among the muni-friendly tax provisions contained in this wide-reaching package of legislation that Senate Republicans have blocked from consideration.
Former National Association of Bond Lawyers President Dee Wisor of Butler Snow in Denver said Trump and Republicans in Congress have had four years to act on infrastructure “and nothing has happened.”
“I suspect that a Biden administration with a Democratic Congress might use tax-exempt bonds or direct- pay bonds as a tool for both infrastructure and economic recovery, like [the American Recovery and Reinvestment Act] in 2009, as well as potentially clean energy and climate change,” Wisor said.
Charles Samuels of Mintz Levin, counsel to the National Association of Health & Educational Facilities Finance Authorities, agreed.
“After nearly four years we basically have no Trump position on tax-exempt bonds,” said Samuels. “He started off very much in favor of an infrastructure bill. He lost his enthusiasm because of the politics involved. We never really understood where tax exempt bonds stood in all that.”
The Trump administration early on discussed public private partnerships but has dropped any mention of that.
Samuels said the Trump administration and the Federal Reserve have taken emergency measures to help the municipal bond industry during the COVID-19 pandemic, but not much more than that.
On the other hand, Samuels said a Biden administration would be expected to be pro infrastructure, pro green infrastructure and pro renewable energy.
“Those programmatic ideals will require a slew of changes in the bond rules,” Samuels said. “What they will be depends on who gets what in the administration.”
He predicted there could be efforts to reform the tax-exempt municipal bond market in favor of taxable direct-pay bonds and tax credit bonds. “They will be sympathetic to the purpose and role of municipal bonds,” he said. “The question will be will they try to divert financings into other mechanisms.”
The infrastructure legislation will be an early priority in 2021 but other more pressing issues could delay it, including the possible failure of Congress and President Trump to agree to another round of stimulus legislation during a year-end lame duck session. Another possibility would be the urgency to act if the Supreme Court strikes down the Affordable Care Act or immigration policies dating back to the Obama administration.
If Trump is re-elected, his administration would seek to make permanent expiring provisions of the Tax Cuts and Jobs Act and also cut the capital gain tax to 15% from the current 20%. Achieving either of those goals would be difficult because Democrats are expected to keep majority control of the House and may regain control of the Senate.
White House National Economic Council Director Larry Kudlow has said the administration would like to cut the capital gains tax to 15%.
“We’d like to take it back to 15% where it was for quite a long time because it helps jobs, investment, productivity and wages,” Kudlow told reporters Aug. 20 during a White House driveway interview.
Kudlow also said it was “not the case” that Trump would try to do it through executive order, but he did contrast the Trump administration’s goal with Biden, who he said is proposing to effectively increase capital gains to nearly 50%.
The Penn Wharton Budget Model estimated that reducing the top capital gains and dividends tax to 15% from its current 20% “will only benefit tax units in the top 5% of the income distribution, with 75% of the benefit accruing to those in the top 0.1% of the income distribution.”
Former Vice President Joe Biden has outlined detailed plans for a mix of tax increases that roll back much of the Trump tax cut, expands some tax credits and creates new tax credits.
Biden’s tax plan calls for reinstatement of the top individual income tax rate of 39.6% for households earning over $400,000.
Wisor said that provision “should result in more demand for tax-exempt bonds.”
Biden’s tax plan would require Democrats winning majority control of the Senate.
In addition, the state of the economy in 2021 would play an important role in the timing of any tax increases.
In addition to increasing the income tax rate for taxpayers with incomes over $400,000 Biden’s plan would limit the value of itemized deductions to 28% for those for taxpayers. These high income taxpayers also would be subject to Social Security payroll taxes.
Capital gains and dividends would be taxed at the same rate as ordinary income for taxpayers with incomes above $1 million.
Biden’s plan would increase the top corporate income tax rate to 28% from 21% and impose a 21% country level foreign minimum tax as well as a 15% minimum tax on companies’ global book income.
The nonpartisan Tax Policy Center said the tax increases on businesses would be partially offset by several new tax credits, most significantly a 10% credit for new investments in domestic manufacturing.
Jon Talisman, who served as assistant Treasury secretary for tax policy during the Clinton administration, said it will take some time for a new administration to nominate key people such as the Treasury secretary, director of the Office of Management and Budget, White House chief of staff and even his old position as assistant for tax policy.
“All of those people will have views as to what should get done and how they should get done,” said Talisman, founder and managing partner of Capitol Tax Partners, during a recent forum sponsored by Tax Analysts.
Talisman noted that when President Obama first took office in 2009 the financial crisis took priority over his campaign pledge to raise taxes on the wealthy. ”Raising taxes on wealthy people was deferred until the fiscal cliff negotiations in 2012, so you're really talking a four year period before that campaign proposal came up,” Talisman said.
More immediately, Talisman said the nation’s debt limit will be reached in mid-2021. “The debt limit is obviously a critical and difficult task in any situation,” he said. “But certainly, it will be one that's probably even more critical with the deficits that we're running as a result of COVID to see how people react to it.”