WASHINGTON – Hillary Clinton's tax plan would benefit municipal securities more than the one by Donald Trump due to its proposed bump in individual income taxes, according to a recent analysis by Neuberger Berman.
The analysis, recently released by the New York City-based investment management firm, focused on four components within the candidates' proposals: individual income tax; alternative minimum tax; exemptions, deductions and credits; and corporate income tax.
Clinton's plan includes the so-called Buffet Rule and would raise taxes on high income earners. She would impose a minimum 30% tax rate on households with adjusted gross incomes of $1 million or more as well as a 4.5% surcharge on income of more than $5 million. She would keep the top tax bracket at 39.6%.
James Iselin, head of municipal fixed income at Neuberger Berman and the author of the analysis, told The Bond Buyer on Friday that higher taxes generally mean greater post-tax appeal for municipal bonds. Clinton's plan proposes no change to AMT or the corporate income tax.
"On the surface, you'd have to say Clinton's plan [is better for munis] because she calls for a raise of the highest tax bracket for the highest earners," Iselin said. "This is from an already fairly high level, so in theory it's good for munis."
Still, he called the Democratic nominee's proposed 28% cap on the value of most deductions a "wild card" due to its vague nature. If applied to munis, he said, the cap on the value of the exemption would "obviously" negatively impact the muni market. Clinton has not yet made it clear whether munis would fall under the 28% cap.
Trump, meanwhile, has proposed capping itemized deductions at $100,000 for single filers and $200,000 for couples, which Iselin said would also negatively impact munis if it applies to them. The Republican nominee has also proposed reducing the corporate top rate to 15% from 35%, a decrease that the investment management firm said could reduce demand for munis from banks, insurance companies and other institutions.
A positive of Trump's plan is his proposal to repeal the AMT, which currently applies to private activity bonds and lowers the demand for them, causing their yields to be higher. PABs could experience increased demand under Trump's proposed elimination of the AMT, Iselin said.
Trump's plan also proposes reducing the current seven-bracket income tax code to three brackets of 12%, 25% and 33%.
"Trump's plan originally called for the highest federal tax bracket in the 20%-30% range," Iselin said. "He's since upped that to 33%, so that would weaken the muni market just at the margins."
Both candidates have expressed interest in infrastructure spending, which Iselin said could mean new opportunities for muni investors.
"The way the U.S. funds infrastructure spending … the muni bond market carries a significant part of that load," Iselin said. "If there does turn out to be an increased push for more infrastructure spending, the muni market is going to play a significant role. Perhaps it will translate into new issuances and new capital projects."
Clinton would create a national infrastructure bank that would administer Build America Bonds, which would be renewed and expanded under her plan. She has proposed increasing infrastructure spending by $275 billion over five years.
On Thursday, Donald Trump announced he would seek to spend $1 trillion on infrastructure over ten years to be funded mostly by tax credits and private investment. This is a spike in infrastructure funding from Trump, who previously proposed doubling Clinton's proposed funding level.
Iselin anticipates "turbulence" in the muni market due to the tax proposals, but added that a potential buffer is that muni valuations remain relatively modest. According to August muni market data, 10-year munis are yielding more than 90% of yields on Treasuries with the same maturities, an increase of 8% from pre-recession levels.
Any large-scale tax code reforms would be contingent on a clean sweep of Congress as well as the administration and Congress, according to the report. -30--
"Barring a wholesale sweep in either direction, we anticipate only modest changes, if any, to the tax code in the coming year," the report read.
The Neuberger Berman report is the latest tax plan analysis to be released as Election Day nears.
The Tax Policy Center said earlier this month that Clinton's plan would increase federal revenue by $1.4 trillion and reduce federal debt over 10 years, while Trump's would increase the federal debt over the same span.
The Tax Foundation also recently estimated that Clinton's plan would raise federal tax revenue by $1.4 trillion over the next decade, while Trump's would increase the federal debt by $7.2 trillion.
