The Senate's flip to a Democratic-majority makes an infrastructure bill likely to pass in the coming months, and key lawmakers support including important municipal bond provisions.
Democrats will officially gain control of the Senate later this month following the swearings in of Jon Ossoff and Raphael Warnock, who won runoff races in Georgia earlier this month. That will leave the Senate with 50 Republicans, 48 Democrats, and two independents who caucus with the Democrats. Vice President Kamala Harris provides the tiebreaker to give Democrats the edge.
A Democratic Congress and White House mean a solid chance for some sort of infrastructure bill to break through, sources say. This comes as the Chamber of Commerce launched an initiative on Wednesday with over 130 organizations to push for an infrastructure package by July 4.
“The fact that both Houses of Congress and the White House are all the same party greatly increases the chances of getting something done in general, which is a positive,” said Michael Decker, senior vice president of policy and research at Bond Dealers of America. “We don’t know for sure what the outcomes of the discussions will be, but I think we’ve got a better chance than ever of getting some meaningful infrastructure legislation enacted that would include municipal bond provisions.”
Municipal bond provisions are set up for success in the next Congress. Last summer House Democrats passed the Moving Forward Act, which has expired and will need to be introduced in the new Congress but which contained numerous bond provisions. Among those were expanding the use of tax-exempt private activity bonds, permanently reinstating Build America Bonds and reinstating tax-exempt advance refunding bonds. Those provisions were headed by House Ways and Means Chair Richard Neal, D-Mass, who will continue to chair that committee in 2021.
Rep. Earl Blumenauer, D-Ore., is hopeful that they can use that legislation as a framework for their work in this new session.
“Part of what I hope happens is dealing with the reality that we need to deal with the financing of infrastructure,” Blumenauer said during an American Society of Civil Engineers webinar Tuesday.
Sen. Ron Wyden, D-Ore., is expected to be chair of the Senate Finance Committee. Blumenauer said Wyden has historically been very interested in supporting mechanisms that enable long-term infrastructure.
“Particularly in the short term, there will be reliance on being able to use these historically low-interest rates to supercharge this effort,” Blumenauer said.
That means being able to use the current low-interest-rate environment to “use the full range of tools available for bonding,” Blumenauer added.
“Chairman Neal is very interested in that and has been a champion for Build America Bonds,” Blumenauer said. “At the front end, that is going to play a large role and it should.”
Wyden prefers to push legislation that has bipartisan support, and could make changes to the House bill to get a few Republican votes. Wyden in the past has supported the creation of direct-pay bonds and tax credit bonds.
Other ways to finance an infrastructure bill in a Democratic Congress would be to implement tax increases, rolling back 2017 tax legislation.
As a presidential candidate, President-Elect Joe Biden talked about raising the top income tax rate to 39.6% from 37%, a net positive for munis as it would increase demand.
“If marginal rates were raised, it could make tax-exempt bonds more attractive to a larger number of investors which would improve demand, improve liquidity and hopefully improve financing rates for state and local governments,” said BDA’s Decker.
Congress could also consider imposing a cap on the value of the tax exemption, which would hurt the municipal bond. So investors in a 39.6% bracket would pay an 11.6% tax on otherwise tax-exempt interest earned on their municipal bonds, for example, Decker said. The difference of the investor’s bracket and 28% would be the tax rate.
“It would be a really bad outcome,” Decker said. “It would pretty significantly erode the value of the tax exemption for a lot of investors, it would make financing significantly more expensive for states and local governments.’
That move would make investments in municipal bonds less attractive for anyone in a tax bracket higher than 28%.
“Investors would need to be compensated in the form of a higher rate of return, or a higher interest rate paid by state and local governments to compensate them for the tax liability they’d face under the proposal,” Decker said.
Decker said that issue specifically is bound to arise again.
In the Senate Environment and Public Works Committee, expected Chair Sen. Tom Carper, D-Del., said he had plans to go back to the drawing board for the next surface transportation reauthorization bill, according to media reports earlier this month. He plans to be more aggressive on climate change initiatives.
In 2019, the EPW committee unanimously passed a surface transportation bill led by Chair John Barrasso, R-Wyo. Many transportation groups were hopeful that that bill would be re-introduced in the new Congress.
If a new bill is introduced in that committee, sources expect Carper to be informed by the Moving Forward Act and Biden’s Build Back Better Plan that has many climate initiatives.
The Public Finance Network — a group of state and local public sector groups — is putting together a tax-exempt muni bond primer and press conference at the end of the month for incoming lawmakers to push the importance of the muni market.
Carper’s future bill won’t be partisan, said Jim Tymon, executive director of the American Association of State Highway Transportation Officials.
“I don’t think you’re going to see a seismic shift here, you’re just going to see the ability to do more in areas of climate change and some of the other priorities that Sen. Carper had but I don’t expect it to shift to a purely partisan bill,” Tymon said. “I still think they’ll be able to come together and do something in a bipartisan manner.”
House Transportation and Infrastructure Committee Chair Peter DeFazio, D-Ore., has said he wants to use the Moving Forward Act as the foundation for an infrastructure bill.
However, a slim margin in the House may mean more bipartisanship, Tymon said. The House has tight margins with a 222 to 211, Democratic leading majority.
“There is a desire for something that is done in a bipartisan manner — that doesn’t mean that you won’t see a focus on climate change and moving to address some of the important priorities that a Democratic Congress is going to have, but we’re very hopeful that this is an area where Democrats and Republicans come together and get something done,” Tymon said.
A Democratic Senate does make an infrastructure bill more likely and easier to pass compared to a divided Congress like in 2020, Tymon said.
A future infrastructure bill in the Senate still hinges on getting 10 Republican votes to ensure that legislation can't be stalled by a filibuster.
The Senate could use another tool called the budget reconciliation process, which bypasses the filibuster rule. Decker said an infrastructure or tax bill could pass that way. In fact, the 2017 Tax Cuts and Jobs Act was passed through that process.
However, the budget reconcillation process places certain restrictions on what can be included in the legislation, as it is intended as a way to make changes to mandatory spending levels. Democratic leaders have signaled they would go that route to pass a combined infrastructure and COVID-19 relief package.
Other sources predict that municipal bond provisions could be included in a $3 trillion dollar relief and infrastructure package, said Tom Kozlik, head of municipal strategies and credit at Hilltop Securities.
“We expect any of the items formerly included in the HEROES Act or Moving Forward Act could be included in the $3 trillion package,” Kozlik wrote in his Jan. 8 report. “This package could include municipal bond-friendly elements like the return of tax-exempt advance refundings and a sequester-proof BAB-like infrastructure bond program.”
“Currently, Democratic control is vitally important in order to pass any substantial legislation,” Kozlik said. “Anyone who has been watching the logjam in Washington since the summer related to COVID-19 relief can attest to that. Substantial legislation is what President-elect Biden, soon-to-be Senate Majority Leader Chuck Schumer and House Majority Leader Nancy Pelosi are likely to present in the weeks after the Jan. 20 inauguration.”
