Municipal market thought leaders are staying positive about the threat to the muni tax exemption, and trying to tamp down the most dire talk of a retroactive action that would remove the tax exemption from outstanding debt.
"At present, there is no threat whatsoever to the tax exemption of outstanding bonds," said Vikram Rai, lead strategist at the municipal division at Wells Fargo.
"I firmly believe that if there is an attempt to curb the benefit of tax exemption, then it will not be retroactive, it will be proactive, so outstanding bonds will not be impacted. The idea is to save the federal government money."
Rai believes the muni market may be insulated from changes in the tax status as spending on the local level negates the federal government's need to fund state and local projects.
"In the muni markets the state and local governments spend their own money" he said. "They raise their own money to build hospitals, schools, bridges and tunnels, so the federal government doesn't have to. I want to believe that we will be protected."
The comments came during a panel discussion produced by the Volcker Alliance and the Penn Institute for Urban Reserach Advisory Board on Thursday.
The muni industry remains alarmed and engaged by the possibility of a tax exempt elimination which showed up as a line item on a
Fiscal and monetary policy makers are trying to solve several intractable financial problems simultaneously including a budget deficit, a March 14 deadline for raising the debt ceiling, and a heavy debt load.
"The biggest risk is that we see a major sell off in the bond market," said Mark Zandi, chief economist of Moody's Analytics.
"The bond market feels incredibly fragile to me. The plumbing is broken. The primary dealers aren't keeping up with the amount of debt outstanding, the owners of the Treasury debt are shifting away from the Fed and central banks to hedge funds which are rapacious. They're very price sensitive."
The country's financial future has become more complicated by cost-cutting measures that have disrupted the flow of funds to the states, which so far hasn't had any effect on credit ratings.
"The outlook for state and local governments this year is neutral," said Eric Kim, senior director at Fitch Ratings' U.S. public finance department. "We do expect that credit quality will be stable and strong. Fitch sees governments managing a weaker but normalized revenue environment as economic growth cools."
Fitch is also keeping an eye on numerous
"Midwestern states' economies could be particularly vulnerable to imposition of blanket tariffs on imports from those three countries, and natural resource rich states could face the most direct consequences from retaliatory tariffs," said Kim.
Michigan is the most vulnerable due to automotive components crossing the border. Illinois comes in second due to its oil refineries. Tariff retaliation by other countries would impact leading exporters including North Dakota, Louisiana and Texas.
The near-term future for the country's financial health is clouded by several fast-approaching obstacles.
"We've got the potential for a government shutdown in the not-too-distant future," said Zandi. "The debt limit needs to be resolved. By our calculation, the X date when the Treasury runs out of cash is late July, early August."
"The bottom line is the economy came into 2025 in a pretty good spot. It should be able to weather a lot of storms, but it feels like there's a lot of storms coming."
