“Plenty of the strategists and pundits who petitioned Senators and Congressmen on our behalf for the municipal market have their hair on fire, anxious that the exemption goes to go away,” said Eric Kazatsky, head of Municipal Strategy for Bloomberg Intelligence. “It is not as easy as just saying with the stroke of the pen your exemption is gone. It doesn’t work like that.”
Lori Hoffman/Lori Hoffman for Bloomberg
Promised tax cuts, a deficit that is uncontrolled and billionaires seeking to shrink the federal government are careening towards a head-on collision as muni leaders brace for more attacks on the tax exemption.
“Plenty of the strategists and pundits who petitioned Senators and Congressmen on our behalf for the municipal market have their hair on fire, anxious that the exemption goes to go away,” said Eric Kazatsky, head of Municipal Strategy for Bloomberg Intelligence.
“It is not as easy as just saying with the stroke of the pen your exemption is gone. It doesn’t work like that.”
The comments got here during a panel discussion on Thursday produced by The Volcker Alliance and the Penn IUR Advisory Board.
Concerns are running high within the muni community that a Congress obsessive about cost cutting could find their approach to ending the tax-exempt status of municipal bonds. Other out- of-the-box solutions being proposed include eliminating personal income tax.
“We heard buzz today, and it’s actually uncorroborated that there are draft bills going around within the Florida White House talking about elimination of the federal tax and replacing it with a flat VAT or sales tax within the 17 to 19% range,” said Kazatsky.
“That is hugely impactful to the lower end of the economy as they’d go from getting a few dollars back at the top of the 12 months from Uncle Sam to having their cost of living raise by a big amount.”
Billionaires Vivek Ramaswamy and Elon Musk have teamed as much as form the Department of Government Efficiency with lofty budget cutting goals by the use of eliminating federal departments and programs which have not been reauthorized by Congress.
“You’ve got Scott Bessent, nominee for the Secretary of Treasury on the market together with his 3-3-3 plan talking about bringing the budget deficit all the way down to 3% of gross domestic product” said former House Representative, Carolyn Bourdeaux. “Straight away, it’s over 6% so it will cut that in half, which is a giant lift.”
“Then we’ve the Tax Cut and Jobs Act extenders. Folks who don’t need to care in any respect in regards to the debt or the deficit, only a straight up extension without offsets goes so as to add $4 trillion to the national debt through fiscal 12 months 2035.”
The TCJA knocked out advance refunding of tax-exempt municipal bonds and put a $10,000 cap on the deduction for state and native taxes, a one-two punch to the muni market.
In response to many experts paying for extending the TCJA brings up an inventory of familiar victims that features Planned Parenthood, the Corporation for Public Broadcasting, and Medicare/Medicaid payments to the states.
College riots over the war in Gaza spurred Congressional hearings and resignations at Columbia, Harvard, and the University of Pennsylvania.
Colleges and universities at the moment are facing credit hits from dropping enrollments as their tax-exempt bond financing emerges as a goal.
“Abruptly you had people in Congress, saying, ‘Wait a second, Harvard has $100 billion on endowment, and so they could borrow tax-exempt. Why is that taking place?'” said Kazatsky. “They got on the radar there, and we’re unsure they’re coming off anytime soon.”
Big picture worries about recession have been replaced with concerns about inflation.
“If you happen to add three policies, lower taxes, higher tariffs, restrictions on immigration. These all have some upward lift on inflation,” said Torsten Slok, a partner and chief economist at Apollo.
“If you happen to have already got a powerful economy combined with inflation, not back at 2%, that implies that the Fed is probably going going to chop less, and subsequently short rates of interest will stay higher for longer.”
Higher rates haven’t had much effect on munis these days.
“We had higher rates for the last two years and the muni market saw record issuance this 12 months,” said Kazatsky. “That shows an enormous level of insensitivity in terms of borrowing out there for municipal issuers. It eliminated a taxable municipal market, which went from about 13% of total issuance to about 2%.”