Reconciliation budget talks revive hopes for muni market agenda

As Senate Democrats work to revive a reconciliation spending package, municipal bond lobbyists hope for a fresh opportunity to push through the federal muni agenda.

Sen. Chuck Schumer, D-N.Y., has reportedly been negotiating for weeks with Sen. Joe Manchin, D-W. Va., about the terms of a spending package that would advance President Joe Biden’s agenda ahead of the midterm elections.

Schumer has said he would like to pass a scaled-back reconciliation package in July ahead of the August recess. On Wednesday, the Majority Leader took a formal step toward advancing the bill when he submitted a Medicare prescription drug pricing proposal with the parliamentarian to determine whether it complies with the Byrd Rule, which is required for the reconciliation process.  Budget reconciliation allows the Democrats to avoid a filibuster and pass a bill with a simple majority.

The negotiations mark the latest move in a months-long process to get Manchin and all Democrats on board with a slimmed-down Build Back Better package that would feature lowered drug costs, billions to fight climate change, and increased taxes.

An early version of the bill unveiled last year totaled $3.5 trillion and included key muni asks like tax-exempt advance refundings, a direct-pay bond program and expansion of bank-qualified debt. The provisions were dropped by the end of October as lawmakers and the White House trimmed the bill's size.

In December, the House passed a $2.2 trillion bill, which also lacked any muni items. The bill was abandoned in the Senate when Manchin, considered perhaps the most conservative Senate Democrat, dropped his support.

More recently, Schumer and Manchin have signaled the bill may be resurrected, with early talk of a price tag of around $1 trillion, which would include $500 billion in new spending on climate and energy.

For the muni market, the question is whether the fresh round of negotiations crack open the door to the market's agenda.

“We’ve been talking with tax staff about a revived reconciliation bill and we (I think everyone) realizes that there may be only one bite at the apple,” said Emily Brock, lobbyist for the Government Finance Officers Association. “It's been a priority for several years to raise the bank-qualified limit from $10 million to $30 million pegged at the borrower level. It seems like a no-brainer to include at least that. And we know [House Ways and Means Committee] Chairman [Richard] Neal gets it.”

Neal is considered a top Congressional friend to the muni market, and as Ways and Means chair he has considerable power over what tax provisions end up in any House bills.

But the path forward remains very uncertain, said Brett Bolton, Vice President and Head of Government and Industry Relations at Bond Dealers of America.

“While it still seems to be a steep hill to climb, hearing that the Majority Leader has submitted some policy proposals to the Senate Parliamentarian does seem to project some confidence that movement is feasible prior to the election,” Bolton said. “However, passage of any sizable spending bill still remains a long shot. At this time, it seems that munis are on the outside looking in, but we are hopeful that there will a robust amendment process in which munis will receive some consideration.”

On the other side of the coin, the bill poses a threat to the muni market if it continues to feature an adjusted corporate minimum tax.

“There is interest in seeing if we can be part of this reconciliation process,” said Charles Samuels of Mintz Levin, counsel to the National Association of Health & Educational Facilities Finance Authorities. “But equally there is concern that the push by the Democrats for strengthening corporate minimum tax will include tax-exempt interest and adversely affect the market,” he said. “So there is both an offensive and defensive side to the efforts.”

The new 15% corporate minimum tax included in earlier versions of the bill would apply to the adjusted financial income for corporations with more than $1 billion in annual income. By including financial reporting income, the provision would likely include tax-exempt income – a provision that the muni industry warns would hurt demand.

The one tax agreement that Democrats, including Manchin, have already reportedly reached would broaden a 3.8% investment income tax on high-income earners, a move that would generate $200 billion to cover the cost of the Medicare Trust Fund. The expanded tax was also included in the $2.2 trillion reconciliation package passed by the House.