Roaring Down the Track: Tax Reform

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WASHINGTON – Donald Trump's presidential victory and the Republican-controlled Congress set the stage for historic tax reform that has the potential to jeopardize the tax exemption for municipal bonds, according to market participants.

Both Trump and Republicans are pushing for tax reform plans that would lower individual and corporate tax rates and broaden the tax base, repealing or restricting tax deductions and exemptions. 

Sen. Chuck Schumer, D-N.Y., who is likely to take over as the highest ranking Senate Democrat following the retirement of Sen. Harry Reid, D-Nev. at the end of the year, has also made tax reform a high priority, as has House Speaker Paul Ryan, R-Wis.

 "The win, because it means that the GOP will control the executive office and both houses of Congress, almost surely means the next Congress will act on major tax legislation focused on cutting rates," said Frank Shafroth, director of the Center for State and Local Government Leadership at George Mason University. "I would guess it will be the most significant, early bill signed into law by the new president."

"They're going to strike while the iron is hot," agreed Chuck Samuels, a partner at Mintz Levin.

The tax reform legislation could be the most significant since the 1986 Tax Reform Act, said Shafroth. That law contained major curbs on municipal bonds.

Scott Sinder, co-chair of Steptoe & Johnson's government affairs and public policy group, said during a webinar on Thursday that he expects coordination and discussion across both sides of the aisle that may lead to form of legislation during the first few months of the new Congress.

"The blueprint the House laid out is very close to Mr. Trump's proposal," House Ways and Means Committee chairman Kevin Brady said on Wednesday.

"But one big caveat is how well the Republican party will come together around their own vision of tax reform and get negotiations going," Doug Kantor, a Steptoe partner and former deputy chief of staff and special counsel for the Department of Housing and Urban Development, said during the law firm's webinar.

Neither the Trump nor the House Republican plan contains details or specifies what deductions and exemptions might be repealed. Market participants worry that the exclusion on interest for tax-exempt bonds could be capped or eliminated to raise revenue for other tax reforms or increased infrastructure spending.

"In the last 24 hours, tax exemption under possible tax reform in 2017 or 2018 has gone from a concern/priority to 'hair on fire,'" said John Vahey, managing director of federal policy for Bond Dealers of America.

The concerns stem from Trump's lack of detail on the revenue raising portions of his tax reform and infrastructure plans, he said.

"This is going to be a very big item for the muni market," Vahey added. "With a unified executive branch and legislative branch, it's a whole new ballgame."

Charlie Henck, a partner with Ballard Spahr here, said it's a given that the tax exemption for municipal bonds will be on the table during the tax reform debate. "In the years I've been watching Congress and all of the new administrations, you can take it as a given that the economic folks at the Treasury Department and the Joint Committee on Taxation will put the tax exemption for munis on their hit list," Henck said. "It's generally thought by those folks to be an inefficient incentive."

Henck said he expects state and local groups to rally together to maintain the tax-exemption for muni bond interest, which is currently excluded from taxes.

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