Congress is trying to solve multiple math problems while trying to pass a budget and pay for tax cuts, which has lawmakers looking at killing off the tax exemption of municipal bonds which could filter down to small investors.
"It's a misconception that tax-exempt bonds protect the wealthy," said Vikram Rai, lead strategist at the municipal division at Wells Fargo. "About 75% are held by retail, meaning moms and pops."
"If you tell them that suddenly your bonds are taxable, it'll destroy the wealth of a $4 trillion market by about 33%. Talk about burning down the house to cook a steak. This is what's happening."
The comments came during a panel discussion at the National Association of State Treasurers Legislative Conference on Monday in Washington, D.C.
Muni advocates are taking an all-hands-on-deck approach to fighting the removal of the tax exempt status of municipal bonds that appeared on a 50-page hit list of possible pay-for targets that has been circulating through Congress since
The basic numbers that Congress is using starts with costs associated with extending the Tax Cuts and Jobs Act which killed off the advance refunding of tax-exempt bonds and capping the state and local tax deduction.
"If we want to extend the Tax Cuts and Jobs Act, here are all the different ways that we could potentially pay for that tab, which, by the way, is $4.5 trillion," said Emily Brock, director of the federal liaison center of the Government Finance Officers Association.
"At $350 billion the tax-exempt municipal bond is one of the top ten tax expenditures of the federal government. I can guarantee we have a bull's eye on us right now."
The list provides little detail and round numbers leaving analysts and experts to puzzle out exactly what Congress is looking at, where the numbers are coming from, and what's included in the estimated savings.
Some believe the tax exemption will be kept in place for outstanding bonds to avoid burning down the house, but Rai believes the perceived savings numbers currently being discussed are all inclusive.
"It definitely seems retroactive, not prospective, which is very disheartening, because that means that it will destroy wealth suddenly," he said.
Lobbying efforts to keep the tax exemption in place is being laser-focused on Republican lawmakers on the House Ways and Means Committee, especially if their background includes stints in local governments where munis were effectively used to fund infrastructure projects.
"What if the state of Michigan had to issue all of their debt taxable?" said Brock. "We found that the difference between taxable and tax exempt was about 2.1%. You layer that 2.1% onto $4 trillion and that ends up being an $824 billion price tag."
The GFOA's numbers compute out to a $6,500 increase per household in taxes that will have to cover the difference in financing roads, bridges, and water systems.
Part of the job of talking lawmakers into sparing the tax exemption is dealing with objections regarding replacements including establishing a federally controlled national infrastructure bank.
"I love having referenda and choices about what infrastructure happens in my own community," said Brock. "If decisions are made inside the beltway, how long are we going to have to wait for that new highway?"
Expanding the use of public-private partnerships to shore up capital funding where tax exempt munis are missing is another possibility.
"I talk with the American Society of Civil Engineers, and they have this interesting dynamic, considering how much private investment in infrastructure will be the sweet spot, but Skanska might not have the profit motive to go into tiny town Kentucky."
