WASHINGTON – House Speaker Paul Ryan announced Friday that congressional lawmakers will add a fourth tax bracket to the tax reform package for high-income households, which would be good news for the municipal market.

A fourth bracket above the proposed 35% top rate would keep tax-exempt bonds an attractive option for retail investors.

Republicans have said in the past that a fourth tax bracket was a possibility, but Ryan, R-Wis., was certain about it as he spoke to CBS This Morning a day after the Senate passed a fiscal 2018 budget resolution.

Paul Ryan
House Speaker Paul Ryan, R-Wis. Bloomberg News

The budget blueprint is designed to be taken up and passed by the House as early as next week without the need for a conference committee.

House Ways and Means Committee Chairman Kevin Brady, R-Texas, told Fox News his panel will release its detailed tax legislation once the budget resolution is finalized.

The budget blueprint would pave the way for a tax reform bill to be done under a parliamentary process known as reconciliation, which in the Senate requires only 50 votes instead of a 60-vote supermajority.

Republicans hold a 52 seat majority in the Senate and would need near unanimity in their caucus to pass tax legislation in their chamber unless they can attract support from Democrats.

Senate Republicans on Thursday rejected a proposed amendment to the budget that would have prevented a repeal of the federal tax deduction for state and local taxes.

That was a setback for state and local government groups that still hope they can preserve the so-called SALT deduction when the tax reform legislation is debated in the House and Senate tax-writing committees.

A few Senate Democrats who face re-election in 2018 have been courted by President Trump to support tax reform, but overall the minority party has been unanimous in opposing tax cuts for the wealthy.

One of the prime targets of criticism from Democrats has been the proposal by Republicans to reduce individual tax brackets to three from the current seven, including the elimination of the 39.6% bracket.

“That’s why we’re introducing the fourth bracket,” Ryan said Friday on CBS This Morning. “So that high income earners do not see a big rate cut and those resources go to the middle class.”

Ryan did not specify what the top rate would be, but tax lobbyists expect it to be close to or identical to the current top rate.

Republicans released a nine-page “Unified Framework for Fixing our Broken Tax code” on Sept. 27 that said, “An additional top rate may apply to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower- and middle-income taxpayers.”

Ryan said President Trump “has been very insistent” that Republicans introduce a fourth tax bracket for high-income individuals.

The municipal market still faces other possible pitfalls in the upcoming deliberations over tax reform legislation, such as the 50% exclusion of investment and interest income that was proposed in the House Republican blueprint for tax reform released in the last Congress.

The unified framework Republicans released last month did not include that proposal. Nor did it mention the tax-exclusion for municipal bonds, but senior administration officials have said the exclusion would be preserved.

Meanwhile, the American Public Power Association sent a letter on Friday to congressional Republican leaders and the Trump administration commending them for preserving the muni exemption.

“Public power utilities rely on municipal bonds to cost-effectively raise capital needed to build, maintain, and improve generation, transmission, and distribution facilities that serve their communities,” said the letter signed by more than 450 public power utilities.

The American Public Power Association said public utilities have used tax-exempt municipal bonds to finance more than 1,200 projects worth $97 billion over the last decade.

“Financing these electric system investments with taxable debt would have increased costs by an estimated $4.5 billion every year—costs that would be borne by public power customers,” the association said.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.