“Lawmakers will need enhanced pay-fors, putting a considerable goal on the municipal bond tax exemption,” said Tom Kozlik, managing director, head of public policy & municipal strategy for Hilltop Securities.  “I feel there may be a 50% or greater likelihood the municipal bond tax exemption will likely be significantly curtailed and even completely eliminated in 2025.”  

Hilltop Securities

Looking into the fixture of tax policy reveals a cloudy crustal ball holding political friction, hard questions on the national debt and the incoming administration’s ability to manipulate, as muni market thought leaders are mainly focused on the prices of high-priced tax cuts. 

“Lawmakers will need enhanced pay-fors, putting a considerable goal on the municipal bond tax exemption,” said Tom Kozlik, managing director, head of public policy & municipal strategy for Hilltop Securities.  

“I feel there may be a 50% or greater likelihood the municipal bond tax exemption will likely be significantly curtailed and even completely eliminated in 2025.”  

The priority stems from precedent as President Trump’s last tax reform bill, the Tax Cuts and Jobs Act, put a cap on the state and native tax deduction and eliminated the advance refunding of tax -exempt bonds. 

The worth derived from cutting advance refunding stays in dispute as efforts to revive it have stalled. 

“Certainly one of the things that baffles our community is why doesn’t advance refunding sunset together with those other provisions comparable to SALT?” said Emily Brock, director, federal liaison center, Government Finance Officers Association.    

The dimensions of the SALT deduction has remained an lively issue because of lawmakers of each parties from high-tax states comparable to Recent Jersey who would love to see the present cap repealed or adjusted.  

The cap limits deductions to $10,000, but many states have instituted workarounds that help businessowners avoid the cap entirely. The longer term is fraught with political peril. 

“I feel that President-elect Trump mentioned doubling the cap, and that is going to upset three quarters of the Republican caucus,” said Brett Bolton, VP of federal legislative and regulatory policy, on the Bond Dealers of America. 

“I assume that the SALT Republicans will ward off hard enough that a bill cannot pass without some form of change next yr.”   

Republicans and Democrats mostly agree on TCJA provisions that provide tax relief to working class families. 

“The ASA supports extending several key provisions of the TCJA, particularly those who profit working families and investors,” said Chris Iacovella, CEO of the American Securities Association.  

“We also imagine that the municipal tax exemption should proceed its role in supporting projects that profit communities in blue and red states and that’s non-negotiable.” 

Through the campaign Trump made guarantees about not taxing suggestions or extra time wages which might also reduce tax revenue.  

The price of extending the TCJA has been estimated by the Congressional Budget Office at around $4 trillion over ten years and increase the federal deficit by nearly $5 trillion by 2034. 

The CBO is a non-partisan government agency that gives budget and economic evaluation to Congress, however the warnings look like falling on deaf ears. 

“There may be a high percentage likelihood TCJA will likely be prolonged and expanded,” said Chuck Samuels, member at Mintz Levin and counsel to the National Association of Health and Educational Facilities Finance Authorities. “Together with tariffs it is the core of the Trump economic program and the bulk in congress is well in line.”  

The opportunity of more tariffs has been affected by withering criticism by most economists. There has also been discussion about turning away from income tax and towards a worth added tax system which will other countries are already using. 

 “A significant query is what latest policy will make it into the sweeping tax bill,” said Emily Cadik, CEO, Reasonably priced Housing Tax Coalition. “Our focus is how inexpensive housing may slot in.”     

Reasonably priced housing ties back to Low Income Housing Tax Credits which depend on a capped amount of Private Activity Bonds which might be issued annually. 

PABs allow private entities to access tax exempt financing to fund a wide range of infrastructure projects and are also a favourite goal of lawmakers looking for ways to interchange the lost revenue.  

“There is a likelihood that Congress may look to limit tax-exempt bonds, particularly private activity bonds,” said Johnny Hutchinson, partner at Nixon Peabody.  

“The idea is that if Congress eliminates tax-exempt financing for a specific kind of project, these projects will still go forward, and can still be financed, but will likely be financed as a substitute with taxable sources of funding.”  

Qualified private activity bonds, which might be utilized by nonprofits to finance infrastructure, showed up in a recent report by the CBO outlining ways to chop the deficit. Based on CBO, eliminating qualified PABs would decrease the budget deficit by $43.1 billion by 2034.

The report excluded qualified PABs used along side financing inexpensive housing.  PABs are deployed in health care facility financing and by issuers in higher education, that are also on the goal list. 

“My broader concern is that there is a lack of know-how about private activity bonds,” said Bolton. “In the event that they wish to go after healthcare or higher-ed, they’re just going to lump all private activity bonds into one grouping.”  

The dimensions of the Internal Revenue Service budget is one other area of interest for cost cutters, although many experts note that boosting IRS enforcement efforts pays for itself. 

The IRS received an $80 billion budget windfall courtesy of the Inflation Reduction Act but then lost $20 billion throughout the debt ceiling negotiations in 2023. More cuts could possibly be coming because the agency’s current commissioner Danny Werfel is more likely to get replaced by presidential appointee Rep. Billy Long, R- Mo. 

“I’ve heard quite a few accounts from accountants and business leaders concerning the IRS fighting a big backlog, unable to process their workload efficiently,” said Kozlik. 

“These outcomes ripple through to state and native governments nationwide, potentially impacting their funds. Nonetheless, increased IRS funding is unlikely to be a politically popular topic in 2025.”  

Many issuers find themselves coping with the IRS for the primary time this yr because of changes to the “direct pay” or “elective pay” system that enables non-profit organizations including state and native government to convert clean energy credits into money refunds. 

“The tax credit provisions within the Inflation Reduction Act of 2022 have absorbed all of Treasury’s time and a focus since its enactment,” said Hutchinson. “We’re still waiting for clarifying guidance on how those provisions mesh with tax-exempt bond financing and other facets.”  

“If there may be reduced IRS funding that would potentially impact this system,” said Brock.  We’re very much not excited by seeing administrative supply in that department go down. Elective pay is a brand-new process.” 

Change is coming to a few of the key committee leadership positions including the House Financial Services Committee where Partick McHenry R – N.C. is retiring and being replaced by current Committee Vice Chairman French Hill, R- Ark. 

“French Hill overseeing House Financial Services is great,” said Brock.  “He’s tuned in with the municipal finance community. We at all times wish to see rural people or individuals who have served in state or local leadership positions, because they get bonds.”  

Sen. Mike Crapo, R- Idaho, who is anticipated to maneuver from the rating member to the chair of the Senate Banking Committee also earns high marks with the muni community.  

The winds of change cannot be stopped but lawyers, lobbyists and policy makers are already busy prepping for what’s on the horizon, especially the potential for eliminating tax-exempt municipal bonds. 

“We proceed to stay concerned,” said Bolton. We’re using that concern and turning it into a chance to further educate members of Congress and their staff on the importance of the tax exemption to be sure that on this discussion and going forward, the tax exemption shouldn’t be targeted as a pay-for.”  

“Our coalition has never been stronger,” said Brock. “Many individuals, and issuer organizations, haven’t relaxed since 2017. The in the beginning thing on that list is preservation of the tax exemption in any respect costs.”  

“I feel the municipal bond tax exemption has a goal on its back,” said Kozlik.  “It’s more likely to be used as a pay-for in 2025 unless public entities and state and native governments vigorously advocate and defend it.”