Movement in both chambers of Congress may turn into meaningful tax legislation that would affect the municipal bond market, raising hope among market advocates.
The House Ways and Means Committee and the Senate Finance Committee are reported to be tinkering with a $70 billion combo deal that would sunset the Employee Retention Credit early which would free up funding for research and development deductions, while extending access to the Child Tax Credit.
"Basically, all tax legislation has stalled until an agreement to advance these two issues emerges," said Brian Egan, director of government affairs, National Association of Bond Lawyers. "It sounds like key tax writers on the Hill have reached a conceptual deal on these two items, but a lot of details remain unknown, including what else could hitch a ride."
Possible side deals include removing the deduction cap for state and local taxes and expanding the Low-Income Housing Tax Credit, two issues of great interest to the bond market. Although obstacles remain for any kind of a deal, lobbyists are keeping hope alive.
"Tax policy proposals to increase investment in affordable housing has increasingly become an area of bipartisan cooperation," said Egan. "We will be watching various proposals in that space in the coming weeks as tax negotiators finalize details on a potential package."
Properties funded through the Treasury's Low-Income Housing Tax Credit are eligible to tap 4% and 9% tax credits. The 9% credits are dispensed through local housing authorities via a competitive award process. The 4% credits are allocated to projects that receive at least 50% of their fundings through tax-exempt private activity bonds, but the of PAB issuance is capped by the federal government each year and is always over-subscribed.
A thaw in tax legislation could also offer clues about what's coming down the pike in terms of debated provisions within the Tax Cuts and Job Act.
"I think this acts as a precursor for what we can expect in 2025," said Brett Bolton, VP, federal legislative and regulatory policy, Bond Dealers of America." I think positively about how they've come together seemingly overnight to craft a bipartisan deal. Whether it passes or not this year, I think that's a good omen for the 2025 debate."
Restoring the pandemic-era expansion to the CTC which expired in 2021 is at the top of the Democrat's wish list. The Republicans are looking to end the ERC, a fraud-ridden program that was designed to help business keep employees on the payroll during the pandemic. Money cut from ERC could be funneled into restoring R&D tax deductions, a priority for Republicans.
Sensing an opening, other legislators are piling onto the bandwagon hoping for a ride to passage of other tax adjustments. Rep. Mikie Sherrill D- N.J. responded to the possible deal via a post on X that read, "In addition to a robust child tax credit, any bill must repeal Trump's devastating SALT deduction cap to bring relief to New Jersey families. Period."
Restoring the SALT deduction has been a longstanding, semi-bipartisan goal of some members of Congress and muni issuers since it was eliminated by the TCJA in 2017. The SALT deduction has been capped at $10,000, a move that bond issuers say infringes on their sovereign ability to levy future taxes. The SALT cap hit residents of high tax states in the northeast especially hard.
The House Ways and Means Committee has toyed with the idea of lifting the cap but in
The driving forces behind the legislative push include a possible government shutdown on January 19 and the IRS-imposed deadline for opening the tax filing season. "Tax filing season starts on January 29 this year, so that will be a huge time pressure for this nascent deal to fully materialize," said Egan.
