How the election will impact the muni market

The election is fast approaching and many economic and tax policies are at stake under the guidance of a new president and changes in Congress. 

Vice President Harris and former President Trump’s only debate, on Sept. 10, largely ignored discussions on economic and tax policies important to the municipal bond market. 

During the debate, Harris promoted her policies for an expanded child tax credit — an issue that some Republicans support as well — and her proposal to increase housing stock by three million and offer a $25,000 subsidy for first-time homebuyers. Those issues are of interest to cities and states, Emily Brock, federal liaison at the Government Finance Officers Association, told The Bond Buyer’s Caitlin Devitt.

Trump’s tariff proposal on foreign goods, which he promised would be “substantial,” also impacts issuers with the potential to disrupt the supply chain and thus infrastructure projects, Brock said. “But I think with [the Tax Cuts and Jobs Act of 2017] tax plan revival that’s going to take place next year, we’re all trying to get a sense of how each promise fits into the larger debate,” she added.

Read more: Kamala Harris’ focus on housing may advance muni priorities 

Harris’ housing policies may be positive for municipals, either through the issuance of new bonds or more housing, but the plan has yet to be fleshed out yet, according to Matt Fabian, partner at Municipal Market Analytics, Inc.

Harris’ affordable housing plan involves transit-oriented developments (TODs), continuing some policies from the current administration. The Biden-Harris administration has made an effort to promote more housing and TODs but it’s been slow going, Yonah Freemark, a researcher at the Urban Institute who focuses on housing, transportation and land use, told The Bond Buyer’s Caitlin Devitt.

“There is a lot of enthusiasm about trying to leverage the transit infrastructure that we have in a way that supports higher ridership and encourages higher housing in those areas,” Freemark said. “There’s a lot of opportunity out there from TIFIA and RIFF, but we’re not seeing anything yet,” he said, noting that a project in Washington  is the only TOD so far to tap the expanded loan authority.

Read more: Trump pitches sovereign wealth fund to pay for infrastructure projects 

Former President Trump announced plans to remove the cap on the State and Local Tax deduction, ahead of a rally on Long Island in September. 

“Many Republicans on Long Island have long since attempted to work across party lines to eliminate the cap,” Emily Brock, director, federal liaison center, Government Finance Officers Association told The Bond Buyer’s Scott Sowers. “With the pandemic and lack of tax titles to address it, the bipartisan efforts haven’t been super successful. This one tiny mention could propel the conversation forward at least to engage the coalition again.”  

Several iterations of eliminating or adjusting the cap have been proposed and abandoned in Congress including the SALT Marriage Penalty Elimination Act proposed by Rep. Mike Lawler, R- N.Y., in February. 

According to numbers from the Tax Foundation, increasing the deduction to $20,000 from $10,000 for joint tax filers who earn under $500,000 in adjusted gross income in 2023, “would cost about $11.7 billion. If the proposed change was extended to 2024 and 2025, it would cost another $25.5 billion over those two years.”   

Tinkering with the cap is likely to be a high-priced bargaining chip during the overall negotiations that will determine the fate of the TCJA provisions that are scheduled to expire at the end of 2025. 

Read more about how this election could impact policies important to the municipal bond market.

How an election sweep or a potential divided government will impact policy

Next year promises to be significant for tax policy and a sweep by either party poses greater risks to the muni market than a divided government. The margins of control of the House and Senate will also help determine the size and scope of potential tax law changes that will affect demand for tax-exempt paper.

Even with a divided government, most experts expect to see tax changes as provisions of the 2017 Tax Cuts and Jobs Act expire at the end of the year and taxes will rise automatically if Congress does not act.

“Ultimately the composition of Congress is going to dictate how attractive munis are going to be,” said Jeff Schulze, head of economic and market strategy at ClearBridge Investments.

Read more: Election: buy-siders brace for sweep, hope for divided government

Tax treatment of nonprofit higher ed at stake in election

The new administration and Congress are expected to take up tax reform next year, and could reshape the tax treatment of nonprofit higher-education institutions. House Republicans have criticized the institutions’ tax-exempt status and passed legislation to increase a tax on large endowments. Risks come from both parties as all lawmakers will be on the hunt for revenue, said higher-ed advocates.

The political uncertainty adds strain to a sector already facing internal pressures and increasingly splitting into haves and have nots. Defaults are rising on a monthly basis, Municipal Market Analytics, Inc. noted in a September default report. “In fact, at $1.06 billion, private higher ed is the third-largest contributor to gross par impairments this year,” behind retirement homes and hospitals, MMA said. “For a sector with only a minimal history of actual, current (as opposed to theoretical, future) credit impairments, this is highly concerning for the near-term trend,” the firm said.

Higher-education supply has spiked this year along with the rest of the bond market. As of the end of August, it was up almost 40% this year, to $27 billion, S&P Global Ratings analyst Jessica Wood said in a recent National Federation of Municipal Analysts’ webinar.

Read more: The politics of higher ed: tax treatment at stake in election

T&I Committee could see new leadership

While the House Committee on Transportation and Infrastructure historically has not delved into political drama, it could face a post-election power struggle for leadership.

“Depending on which party is in the majority, [the American Public Transportation Association’s] strategy and tactics, particularly our messaging, may change,” Paul P. Skoutelas, APTA president and CEO, told The Bond Buyer’s Scott Sowers. 

T&I is currently chaired by Rep. Sam Graves, R- Mo., who has expressed an interest in staying in power even though he’s poised to exceed his six-year term on the Committee. Rep. Rick Crawford, R-Ark., announced in March that he was running for the position.  

Read more: Leadership of House T&I Committee could be a power struggle 

Harris’ affordable housing plan focuses on transit development

As affordable housing has stepped into the spotlight in the presidential election, Vice President Kamala Harris is touting transit-oriented development as a way to increase housing in urban areas.

“Some of the work is going to be through what we do in terms of giving benefits and assistance to state and local governments around transit dollars,” Harris said in a recent MSNBC interview, referring to her policies to increase the housing supply.

The government needs to be “looking holistically at the connection between [transit] and housing, and looking holistically at the incentives we in the federal government can create for local and state governments to actually engage in planning in a holistic manner that includes prioritizing affordable housing for working people,” Harris said.

Transit-oriented developments, or TODs, aim to encourage growth along transit corridors with public buildings or housing near modes of public transportation like light rail, subways and busy bus routes. TODs have started to gain momentum among cities that are increasingly focused on building more houses. The Build America Bureau, the U.S. Department of Transportation’s P3-focused office, boasts a $12 billion pipeline worth of TOD projects in the works, bureau director Morteza Farajian said in a previous interview with The Bond Buyer.

Read more: Transit-oriented development part of Harris’ affordable housing plan 

Trump announces plan to remove SALT cap

Former President Trump in September threw his support behind lifting the cap on the State and Local Tax deduction, a provision included in his own tax law changes, and one that issuers would greatly like to be restored.

Trump made the announcement via his Truth Social network as part of a personal post saying, “I will turn it around, get SALT back, lower your taxes, and so much more. I’ll work with the Democrat Governor and Mayor, and make sure the funding is there to bring New York back to levels it hasn’t seen for 50 years.”

Limiting the SALT deduction was part of the Tax Cuts and Jobs Act of 2017, which is considered Trump’s biggest legislative accomplishment during his term. The cap is touted as a money maker for the federal government but opposed by bond issuers who maintain that the cap infringes on their sovereign ability to levy future taxes. 

Read more: Trump signals SALT cap removal 

Harris and Trump debate ignores muni bond market economic and tax policies

Vice President Kamala Harris and former President Donald Trump shined no new light on the economic and tax policies important to the municipal bond market during their high-stakes debate in September, though brief mentions of housing, energy policy and tariffs carry modest interest to participants.

“The debate was pretty light in general,” Matt Fabian, partner at Municipal Market Analytics, Inc. told Bond Buyer’s Caitlin Devitt. The widespread perception that Harris did well will help her recent polling momentum continue, he added. “Harris’ strong debate performance makes, at a minimum, divided government a bit more likely: a good thing for retention of the tax-exemption going forward.”

The outcome of November’s election will not only decide the presidency but also shape Congress as it gears up to tackle major tax reform as TCJA provisions expire at the end of the year. That has many market participants worried the tax exemption will be altered to offset the costs of extending the provisions.

Read more: Harris, Trump clash in debate that largely ignores muni-market concerns