Muni lobbyists schedule Capitol Hill 'fly-ins' to tout tax exemption

Donna Alberico

With a "defense wins championships" strategy in mind, the municipal market lobby will head to Capitol Hill in the next few weeks for meetings with lawmakers and staff in a high-stakes play to protect the municipal bond tax exemption as the tax reform debate begins in earnest.

The muni lobby's top priority in the 119th Congress will be preserving the tax exemption even as it continues to push other agenda items, such as the return of tax-exempt advance refunding and lifting the ceiling on bank qualified debt.

In 2017, the Republicans crafting the Tax Cuts and Jobs Act, which eliminated tax-exempt advance refunding, maintained the philosophy that "everyone need to feel a little bit of pain because that's the nature of tax reform," recalled Government Finance Officers Association federal liaison Emily Brock. "That philosophy is weighing heavily on my mind," Brock said. "It's becoming abundantly clear that the best defense is a good offense."

With the GOP-controlled Congress focused on finding revenue to cover the costs of extending the TCJA, many market participants worry the tax exemption faces the chopping block. So far, the exemption has not made it into any early drafts of revenue raisers, such as a menu of potential cuts floated by House Republicans last week.

The GFOA and Bond Dealers of America are preparing for meetings in late January and early February with lawmakers and staff, in particular Republican members of the House Ways and Means Committee and the Senate Finance Committee.

The GFOA will be in Washington, D.C. on Jan. 27 and 28, where it has organized eight groups representing 45 congressional districts for meetings. Along with the Public Finance Network, the group will blanket lawmakers and staff with information touting the importance of the tax exemption and bond-financed projects across the country.

The material includes a new report that estimates the tax exemption will save issuers and borrowers about $824 billion between 2026 and 2035, with a projected spread of 210 basis points between taxable and tax-exempt municipal bonds.

Eliminating the exemption would translate into a $6,554 tax and rate increase for every American household over the next decade, the report said.

"We've gotten too used to talking about things in the trillions and we need to normalize the effect on every household of what it means to have the tax exemption," Brock said.

The report also estimates that issuers will pay $1.1 trillion from 2026 to 2035 in borrowing costs, which would increase to $1.9 trillion if the tax exemption ends.

Republicans are in the midst of debating whether to try to pass one massive reconciliation bill that includes tax reform or two separate bills, with the tax policy changes coming later in the year. Either way, the clock is ticking, muni lobbyists said.

"We need to act right now like we have 100 days to save the tax exemption," Brock said.

A two-bill process "definitely gives us more time but regardless, they're putting out some pretty ambitious timelines and it'll take more of 2025 than leadership is publicly proclaiming, and they know this as well," said Bond Dealers of America vice president of federal legislative and regulatory policy Brett Bolton.

In a bit of good news, Indiana Republican Rep. Rudy Yakym, who serves as co-chair of the House Municipal Finance Caucus, was tapped in December to sit on the powerful Ways and Means Committee, Bolton noted.

Rep. David Kustoff, R-Tenn., who introduced a bill last year to restore tax-exempt advance refunding, remains on the committee. "Those are two really important voices," Bolton said.

Kustoff is expected to re-introduce the advance-refunding bill in coming weeks.

On the Senate side, Bolton noted that Sen. John Cornyn, R-Texas, who sits on the finance committee, in 2017 fought to keep PABs in the TCJA and later introduced bipartisan legislation that would lift the cap on private activity bonds.

The BDA will also meet with Senate Finance Chair Rep. Mike Crapo, R-Idaho. "It's not a top priority but he knows fixed income and understands the issues," Bolton said.

As tax reform remains a top focus, the Congress will also need to tackle government funding and the debt limit, Bolton said. "With only a two-vote [Republican] majority in the House, those could be big challenges as well," he said.