Massive tax, spending bill passes House, now heads to Senate

Bloomberg News

The House early Thursday morning passed a massive tax and spending bill that leaves the municipal bond tax exemption untouched after months of market speculation. It now heads to the Senate, which will shape the legislation to its own priorities.

The 215-214 passage of the "one, big, beautiful bill" marks a major victory for Republicans and President Donald Trump. The House passed the 1,000-page package after a 20-hour House Rules Committee and days of intense negotiations, capped by Trump's threat that not supporting the bill would be the "ultimate betrayal."

"It quite literally is morning in America," House Speaker Mike Johnson, R-La., said Monday just before a vote before 7 am ET. "To put it simply, this bill gets Americans back to winning again." Johnson pledged later that Congress would get a final bill to Trump's desk by July 4.

The package now heads to the Senate where Republican leaders have already signaled they want to dial back the cuts to Medicaid and the Inflation Reduction Act's clean energy tax credits. The process "will in all likelihood start nearly from scratch again with senators waiting to make sweeping changes to the legislation," noted the Bond Dealers of America in a Thursday morning alert noting the bill's passage.

One of the thorniest issues proved to be the state and local tax deduction cap. A small group of Republicans from high-tax Democratic states finally agreed to support the bill after the cap was lifted to $40,000 for people making under $500,000 with annual 1% increases through 2033. That's up from the current $10,000 cap, which was imposed in the 2017 Tax Cuts and Jobs Act and was set to expire after this year.

The tax exemption on municipal bonds and private activity bonds were potential early targets but the final measure left the financing tools untouched after weeks of intense lobbying from the public finance industry.

Municipal Market Analytics said the risk to the tax exemption has largely abated. The reprieve is due partly to "bond issuers' and sell-side industry firms' largely successful attempt to build a fledgling network of official and unofficial Congressional supporters of the tax exemption," the firm said.

"As a professional lobbyist, it's impossible not to admire the accomplishment of the President, the Speaker and the Chairman in getting this bill passed," said Chuck Samuels from Mintz and counsel to the National Association of Health & Educational Facilities Finance Authorities. "I also think our broad and deep coalition should take great satisfaction in protecting municipal bonds so far when it was on every Republican hit list leading up to and after the election," Samuels said.

The process is not over though, he said.

"And we should not be so siloed in our thinking that we don't appreciate that critical borrowers like universities and hospitals have taken big hits ranging from the increase in the endowment tax, to restrictions on executive compensation to changes in Medicaid as well as massive reductions in research  monies and other government contracts," Samuels said.

Growing government debt and deficits — which prompted Moody's Investors Service on Friday to cut the nation's rating — means the tax exemption may remain in play in the future, MMA said. "Congress will find its ability to spend more money in need of offsets, and the tax exemption, although now more popular than before, is still one of the larger ones," the firm said.

The House bill makes permanent the TCJA income tax cuts and the increased alternative minimum tax. It eliminates income taxes on tips, overtime, and car loan interest through 2029. It cuts $1.7 trillion over 10 years, largely by eliminating or rolling back clean energy credit programs in the Inflation Reduction Act and cutting Medicaid and the food stamp program.

There are two minor bond-related changes in the bill. One would lower the 50% threshold test for bond-financed 4% Housing Credit properties to 25%, allowing additional buildings financed with tax-exempt bonds to qualify for housing credits. The so-called Low Income Housing Tax Credit fix has been a key priority for housing advocates.

The bill also broadens the use of proceeds for certain qualified small issue bonds, allowing more research and development expenses and certain manufacturing activities to qualify for tax-exempt financing.

Among the last-minute changes in the so-called manager's amendment is an additional $12 billion for states for border security. On the transportation side, the bill includes a new national electric vehicle fee that will be dedicated to the ailing Highway Trust Fund.

The bill also raises the nation's debt ceiling by $4 trillion. Treasury Secretary Scott Bessent warned the country could run out of money to pay its bills by August.

The Congressional Budget Office floated an early analysis saying the bill would raise the deficit by $2.3 trillion over the next decade but the estimate didn't take into account all provisions.

"'THE ONE, BIG, BEAUTIFUL BILL' has PASSED the House of Representatives!" Trump posted Thursday after the vote. "This is arguably the most significant piece of Legislation that will ever be signed in the History of our Country!"