WASHINGTON --- Having consolidated control of both the House and Senate for the first time in eight years, Republicans on Wednesday vowed to end the gridlock and begin passing legislation early next year. President Obama urged Congress to move forward with corporate tax reform to help pay for infrastructure improvements - an issue that has some bipartisan support.
But congressional observers caution that the Republican-led Congress will only have about a year before their focus shifts to the 2016 presidential election and that the Senate lacks the supermajority that will be needed to override a presidential veto.
"There will be pressure to try to do corporate tax reform," said Frank Shafroth, director of the Center for State and Local Leadership at George Mason University. However, it may be hard to push for corporate-only tax reform because many companies are organized as pass-through entities, and they do not use the corporate tax system. Rep. Paul Ryan, R-Wis., who wants to become chairman of the House Ways and Means Committee, has indicated a preference to do both corporate and individual tax reform, said Dustin McDonald, director of the Government Finance Officers Association's federal liaison center.
While most Congressional observers don't see tax reform anytime soon, they warn market participants must be vigilant and continue to step up advocacy efforts for munis, lobbying against curbs to tax exemption and tax-exempt bonds.
"If people continue to pursue reform in any shape, municipal bonds are still at risk," said John Godfrey, senior government relations representative at the American Public Power Association. The tax reform plan put forth earlier this year by Rep. Dave Camp, R-Mich., who currently chairs the Ways and Means Committee, contained provisions in its business section that would have eliminated the tax exemption for private-activity bonds issued after 2014.
"The public finance community got itself well-organized in the last few years," and the community needs to reinvigorate efforts to promote the tax exemption, said Chuck Samuels, an attorney at Mintz Levin and counsel to the National Association of Health and Educational Facilities Finance Authorities. Godfrey said that market participants need to convey to lawmakers the message that munis finance the building blocks that "make commerce possible and our cities livable."
The current Congress will face several potentially controversial issues later this year during the "lame-duck" session after they return to Washington next week.
The latest continuing resolution, which allows government services and programs to be funded, expires on Dec. 11. To avoid another government shutdown, Congress will need to either extend it or pass appropriations legislation. The current CR also extends to Dec. 11 the Internet Tax Freedom Act, which forbids state and local governments from taxing consumer Internet access.
Congress also will be pressed to address expired tax provisions known as "extenders," some of which pertain to bonds, state and local finance, and Puerto Rico. Lawmakers could extend the provisions for one or two years, muni market participants said. McDonald suggested that the provisions could be extended retroactively early next year.
Sen. Ron Wyden, D-Ore., the current chairman of the Senate Finance Committee, wants Congress to pass the extenders. But Wyden is expected to be replaced as chair by Sen. Orrin Hatch, R-Utah and to be relegated to the post of ranking minority member.
The House Ways and Means Committee will also have a new chairman because Camp is retiring from Congress now that his term as chairman is up. Ryan and Rep. Kevin Brady, R-Texas, are both battling to replace Camp. Media reports depict Ryan as the frontrunner but Brady has seniority.
At least two Senators who have sponsored bills relating to bonds and state and local finance during the last two years lost their reelection bids: Mark Pryor of Arkansas and Mark Udall of Colorado.
Pryor, who lost to Rep. Tom Cotton, introduced a bill over the summer that would permanently revive the Build America Bond program at a 28% subsidy rate. He also cosponsored legislation that would provide tax relief to presidentially declared disaster areas. Additionally, he co-sponsored the MFA.
Udall, who lost to Rep. Cory Gardner, also cosponsored disaster tax relief legislation and introduced a bill that would make permanent the federal Payment in Lieu of Taxes program, the currently expired federal government that makes payments to local governments to help offset the losses in their property tax revenues that occur because of the presence of federal lands in their jurisdictions.
Sen. Mark Warner, D-Va. had a tighter race than expected with Ed Gillespie, the former chairman of the Republican National Committee and it had not be called as of Wednesday afternoon. Warner sponsored legislation requiring the disclosure of markups in "riskless principal" transactions. He also introduced legislation that would create a national infrastructure bank.
The Alaska Senate race also did not have a definitive winner. Incumbent Sen. Mark Begich, a Democrat, was trailing Dan Sullivan, a former Alaska Attorney General and Commissioner of the Alaska Department of Natural Resources. Begich took the lead on a letter to President Obama last year that opposed limiting or eliminating the tax exemption for municipal bonds.
Sen. Richard Shelby, R-Ala., expected to be the chairman of the Senate Banking Committee, is expected to push for greater oversight of the Securities and Exchange Commission and to oppose Federal Reserve policy.
The eighty year-old Shelby, who currently serves as ranking minority member of the Senate Appropriations Committee, is poised to reclaim leadership of the committee after having previously led it from 2003-2007. Though Shelby has not been outspoken on muni issues in the past, he has been a strong opponent of many Dodd-Frank provisions and the Federal Reserve's quantitative easing.
But the rise of Michael Piwowar, a former Republican Banking Committee economist who is now an SEC commissioner with strong views on some muni issues, could make Shelby more interested in them, said Bond Dealers of America senior counsel and managing director of federal regulatory policy Jessica Giroux.
"Sen. Shelby believes in strong oversight, especially of the SEC," Giroux said. "Since the SEC has been focusing a great deal of attention on the muni market in the months ahead, the BDA anticipates that Sen. Shelby will dig into the SEC initiatives and we can anticipate the Senate Banking Committee would hold an SEC oversight hearing in the area. It is also important to note that SEC Commissioner Piwowar came from Shelby's staff so it's very likely that Shelby would carefully consider what Mr. Piwowar has to say on issues in front of the SEC."
Piwowar has given several speeches in recent months expressing a keen interest in muni market transparency, particularly with respect to requiring dealers to reveal their markups on so-called riskless principal transactions. He also has questioned the need for extremely complex bond transactions, arguing that securities with fewer bells and whistles would cost less to issue as well as trade more often and contribute to market liquidity.
While Shelby may attempt to repeal sections of Dodd-Frank that Republicans find least favorable, he is unlikely to attempt any kind of full repeal, said Micah Green, chair of the financial services and tax policy practice group at Squire Patton Boggs.
On the national transportation scene, the new Congress will face a May 31 expiration of the current fix for the Highway Trust Fund. But Republicans appear to be divided about how to proceed on transportation funding, said David Goldberg, communications director for advocacy group Transportation For America.
"The Republican caucus is split on the correct level of federal funding for transportation and on the federal role in transportation in general," he said.
Sen. James Inhofe, R-Okla., is expected to become chairman of the Environment and Public Works Committee, replacing Sen. Barbara Boxer, D-Calif. Hatch and Inhofe have both been consistent in their opposition to an increase in the federal gasoline tax to bolster the struggling Highway Trust Fund, but Inhofe said this summer that other options will be considered.
"Coming up between now and May, you'll see a new funding mechanism that is going to change how we are funding our roads and highways," Inhofe said in August. "However it's more of a user fee than a tax increase."
