PALM BEACH GARDENS, Fla. – In the midst of enormous uncertainty about the future of tax reform and its impact on municipal bonds, it is critical for muni market participants, especially state, local and nonprofit officials, to continue to lobby lawmakers to preserve the tax exemption.
These were the two key takeaways from a tax reform panel at The Bond Buyer's and Bond Dealers of America's National Municipal Bond Summit here on Thursday.
"If anyone tries to tell you that they're confident about what will happen in Washington, stop and walk away," said Chuck Samuels, a partner at Mintz Levin and legislative consultant for the National Association of Health and Educational Facilities Finance Authorities who was on the panel.
"By all means, do not let up" on lobbying for tax exemption, said John Godfrey, senior government relations director for the American Public Power Association, another panelist.
Bob Kyle, a partner at Hogan Lovells who formerly was a staffer on the Senate Finance Committee and was in the Clinton administration, said there no doubt will be "a lot of twists and turns" regarding tax reform. He said tax-exempt bond proponents should focus on five things.
First, how is Congress going to pay for tax reform? House Republicans want tax reform to be revenue-neutral and they have proposed a controversial border adjustment tax that would raise $1 trillion in revenues over 10 years to pay for lower tax rates. If they can't sell that to other lawmakers, that's a loss of $1 trillion in potential revenues that would encourage lawmakers to look more toward restrictions, caps or possibly elimination of tax-exemption as a pay-for.
Second, the House and Senate are very different, said Kyle. House Republicans want very fundamental, comprehensive tax reform to lower rates and broaden the tax base. The votes in the House tend to be along party lines. The Senate may be able to live with less comprehensive reform and its members tend to be more bipartisan, he said.
Third, Trump wants tax reform as well as his infrastructure plan. "We've got to see how Trump plans into this whole thing," Kyle said. Trump came out of the gate supporting the House legislation to repeal and replace the Affordable Care Act. That legislation is turning out to be more controversial than expected and that may make the president "stand back a little on tax reform," Kyle said.
Fourth is the process. The House Republicans are trying to do both health care and tax reform through the budget reconciliation process so they can get away with only needing 50 votes in the Senate instead of the 60 normally needed to limit debate to pass bills. "If the reconciliation process is used, they don't need the Democrats" for tax reform, Kyle said.
Fifth is timing. The goal of House Republicans has been for tax reform to pass the House by August, have the Senate take it up in the fall and pass legislation before the end of 2017. The question is whether that is realistic because the closer Congress gets to the 2018 elections, the harder it will be to do comprehensive tax reform, he said.
Kyle said he thinks the odds are that Congress may pass lower tax rates, without comprehensive tax reform that pays for the lower rates. That would help munis, but increase the federal budget deficit.
Samuels said he thinks Congress will pass health care reform (most likely Obamacare light), the House will try to pass tax reform this year and the Senate will try to pass it next year.
"Municipal bonds will not go untouched," said Samuels. "I think it's quite questionable whether [the BAT] survives."
Samuels and Godfrey said if the House Republicans pass a tax reform bill that leaves munis unscathed many muni market participants will want to breathe a sigh of relief. "But that would be a mistake," Samuels said.
Godfrey pointed out that Congress is way behind on following through with the fiscal 2017 reconciliation process for health care and it has to complete or abandon it before moving on to the fiscal 2018 reconciliation process for tax reform.
"I'm pessimistic but scared," he told the audience. Godfrey said that when staffers on Capitol Hill tell him that no one is gunning for tax exemption, "I take that with a grain of salt."
Chris Mier, managing director of Loop Capital Markets' analytical services division, who was also on the panel, said that while the preservation of tax exemption is important, it's also important to look at the House Republican and Trump policy initiatives that could adversely impact the creditworthiness of state and local governments and therefore make it more costly to issue munis. These include initiatives on trade, immigration, health care and even infrastructure.
For example, he said, "Immigration is very, very important to population growth and the economy. To limit immigration is to limit growth."
Mier also criticized Trump's infrastructure plan, saying it's "poorly constructed," as well as, "a bad plan" that will not create growth. Trump's plan, which would use tax credits, is geared toward "very large dealers in urban areas …. It's going to be pork barrel." Mier called the tax credits "a Trojan horse."
Ben Watkins, Florida's bond finance director, said later in a luncheon speech that he completely agrees with Mier. Watkins called Trump's infrastructure plan, "The no plan plan."
"They're enamored with bright, shiny trinkets," they're "fixated on P3s (public-private partnerships)," Watkins said about administration officials. The proven method of financing infrastructure is tax-exempt bonds, he said.
Tax credits are the "roach motel of muni finance – no one wants them in their house," he added. The goal of any infrastructure initiative should be "do no harm," Watkins said.
Meanwhile the tax reform panelists were asked by moderator Justin Underwood, BDA's federal policy advisor, what resonates with lawmakers about the need for tax-exempt bonds.
Kyle pointed out that 70% of the infrastructure in the nation has been financed with tax-exempt bonds, yet there are lawmaker fans of infrastructure who might be willing, for tax reform, "to cut the legs out from under the one thing that works for infrastructure." Lawmakers need to see that disconnect, he said.
Samuels said it is important for small hospital administrators and the chief financial officers of colleges to talk to members of Congress about the importance of tax-exempt bonds – "making it very personal for the people up on [Capitol] Hill.
Samuels also said, "We've got to stay together as a coalition" and avoid any attempts of others to "divide and conquer."
Watkins said at lunch that he's visited every member of the U.S. Congress from Florida, especially the freshmen, and given them documents showing all of the good works that have been financed with tax-exempt bonds in the state. "We're gonna fight the fight like a junk yard dog," he said.
