The balance of power on Capitol Hill seems destined for change courtesy of the upcoming mid-term elections which could put the federal deficit back on the front burner, with potential disruptive consequences for the muni market.
"With the deficit increasing, and with the national debt clearing the $40 trillion dollar threshold in recent weeks, we fully expect the topic of addressing the runaway debt to remain front and center for Congress going forward," said Brett Bolton, vice president of federal legislative and regulatory policy at the Bond Market Association.
The Tax Foundation has compiled a list 86 potential changes to the tax code aimed at solving the deficit problem while extrapolating the impact on federal revenue, long-term debt trajectory, and the economy.
Eliminating the tax exemption on interest paid by municipal bonds is on the list.
According to the Tax Foundation, the tax exemption for munis "violates the principle of a neutral tax code by favoring one type of savings vehicle over others."
The group estimates that eliminating the exemption would decrease the primary deficit by $155.2 billion from 2027 through 2036.
"It's something we have heard before," said Emily Brock, director of the Government Finance Officers federal liaison center.
"We are hypersensitive to any suggestions that the municipal bond is anything but an efficiency because it allows for the building of infrastructure and it happens to be a quite popular asset class for fixed income investors."
As the provisions of the One Big Beautiful Bill Act were being debated
"We got through the big, beautiful bill, and there are people who think that the threat is over," said Tom Kozlik, head of public policy and municipal strategy for Hilltop Securities.
Moving against the flow of OBBBA, the report also explores the notion of eliminating the deduction of state and local taxes which the foundation says would lower the deficit by $207.2 billion over ten years.
OBBBA raised the cap on SALT deductions to $40,000 from $10,000.
Eliminating the cap would increase the budget by $916.3 billion for the same time period.
Low Income Housing Tax Credits were expanded in OBBBA. The report examines the effects of repealing them and New Markets Tax credits to produce a $210 billion cut to the deficit.
"We see sort of a principled approach here as opposed to a political approach," said Brock.
"From a political change perspective, we're going to have to focus on telling the story to the Congress, especially as we're staring down what's going to happen in November."
Muni advocates expect to return to their educational roles when the new Congress begins next year.
"While getting the national debt back in control is a noble effort and a problem that needs to be taken seriously, we call on lawmakers to not just chase cuts for the bottom line, and instead really review the merits of policies and the benefit they provide to their constituents," said Bolton.
"The magnitude of the threat of attack exemption is only going to increase as the debt rises," said Kozlik. "While there's not an imminent threat, it's going to become more severe if lawmakers don't address it at some point."
