As Congress stumbles towards budget resolutions and the debt ceiling debate the future of the tax-exempt status of municipal bonds remains a target for lawmakers looking for ways to boost revenue as the industry leans into the fight.
"Before every new Congress, we go through the process of reassessing our priorities and updating our advocacy materials, said Jason Akers, managing partner at Foley & Judell and president of the National Association of Bond Lawyers.
"With the prospect of tax reform in 2025, we see an elevated need to speak out in support of tax-exempt bonds and the benefits to our communities,"
NABL is responding to the threat with a suite of grassroots
As the Senate and House release and rehash resolutions the group is
"There's a lot coming out of Washington these days," said Brian Egan, chief policy officer, NABL.
"We're keeping our tracker as objective as possible. The goal here isn't necessarily to prognosticate, but rather to serve as a clearinghouse and to rapidly and concisely share information that keeps our members, and the market updated."
Part of the message is laying out what's at stake if the tax exemption gets axed. NABL and other muni leaders are pushing hard on the higher borrowing costs that would result.
"Their higher borrowing rates will translate to less infrastructure and public service, and higher state and local taxes, tolls, fees, and bills for American households," said Egan. "We think the case for preserving tax-exempt bonds is a no brainer."
If state and local governments are forced to issue taxable bonds, business models could dramatically change.
According to a report released by Moody's Ratings in late January, "If the tax exemption for municipal bonds were to be repealed, issuers in the highly fractured, illiquid and at times idiosyncratic universe of U.S. municipal bonds would probably have to change their ways to look more like conventional borrowers in the taxable market."
"They would likely have to grow more comfortable selling single-maturity bonds without call options and with simpler security structures than we currently see. Municipal issuers might also employ more pooled borrowings."
Accounting standards could also play a role in how and if a transition happens.
"If the elimination of tax exemption of municipal bonds comes to fruition, municipal bonds would be placed in a class similar to other courses of fixed-income securities, including U.S. Treasury obligations, sovereign nations' debts, and sub-sovereign governmental agencies' obligations," said Michael J. Ross, Senior Analyst, while writing for
Ross sees possible trouble ahead as two accounting standards boards, the Governmental Accounting Standards Board and the Financial Accounting Standards Board may end up vying for leverage over whatever tax-exempt munis morph into.
"The distinguishing characteristics of each GAAP standard may play an integral role in determining whether an entity's bonds would qualify as taxable or tax-exempt," said Ross.
Questions arise about the tax-exempt status of bonds already issued as
"We believe it is more likely that existing bonds will retain their tax-exempt status, "said Tom Kozlik, managing director, head of public policy and municipal strategy, Hilltop Securities.
"Eliminating the tax-exempt status would negatively impact many retired fixed-income investors, potentially undermining investor trust and resulting in market instability."
