It was not long ago that the Tax Cuts and Jobs Act (TCJA), a historic tax-reform package, came together seemingly overnight and reshaped the U.S. tax code while also reshaping the municipal bond market by eliminating tax-exempt advance refundings.
Once the dust settled, a retrospective review illuminated further near disasters, with Senate Republicans saving private activity bonds after they were eliminated in a House draft of the bill. Thanks to extensive advocacy from the Bond Dealers of America and a broad coalition of issuer advocacy groups led by the Government Finance Officers Association (GFOA), PABs were saved.
Fast forward to 2024. Tax reform is again front of mind with many provisions of the TCJA expiring in 2025, including ALL personal tax cuts, setting up nearly two years of negotiation to strike a deal to extend the package with an election falling in the middle.
Congress will need to pay for the tax cut extensions, and many popular programs and expenditures will be back on the chopping block.
While the tax-exemption for municipal bonds has steadfast bipartisan support, potential threats loom, and the time to act is now.
The Congressional Budget Office (CBO) estimates that a 10-year extension of the TCJA would raise the overall deficit by roughly $3.6 trillion. Coming off three years of COVID and infrastructure spending and with rising debt and deficit numbers, both Republicans and Democrats are finding religion on the budget, resulting in a scramble for offsets.
Historically, Congress has looked at tax expenditures and other large spending programs outside of entitlement programs such as Social Security, Medicare, and Medicaid as a grab bag for offsets. This scenario makes "expenditures" such as the tax-exemption for municipal bonds, which the Joint Committee on Taxation (JCT) estimates costs the federal government upwards of $40 billion annually, at risk as being used as an offset for new spending, much like SALT and advance refundings in 2017, with little policy reasoning backing the decision.
If history is our guide, the threat to the tax-exemption is real. In fact, we need not look far back in history to see this threat. Starting with the deficit proposals advanced by then Ways and Means Committee Chairman Dave Camp in the early 2010s and throughout the Obama era, the tax-exemption was either proposed to be fully eliminated or given a significant haircut.
Key to protecting the tax-exemption and other key financing tools such as private activity bonds, as well to revive tax-exempt advance refundings, is to get in front of the debate early this year, working to strengthen the groundwork that has been laid tirelessly over the past few decades and which increased dramatically in intensity since 2017. As noted throughout, this is a monumental effort and one that needs to be consistent over the next 20 months to turn this threat into an opportunity to advance municipals on Capitol Hill.
We pledge to continue to work in concert with the Public Finance Network (PFN) led by the GFOA which has continued to lead the issuer advocacy efforts and further strengthened the coordination with the creation of the PFN in the wake of the COVID pandemic, to achieve not only protection of the tax-exemption, but to ensure tax-exempt advance refundings are part of the package in 2025.
Since the creation of the Bond Dealers of America, the BDA's Capitol Hill efforts have been solely focused on growing support for municipal finance through a variety of initiatives. This includes boots-on-the-ground lobbying in support of the exemption and other financing tools such as bank-qualified bonds and advance refundings, extensive educational efforts and events for key members of Congress and Capitol Hill staff, coalition building with other advocacy organizations in Washington, and the rebuilding of the Municipal Bonds for America coalition (MBFA), into a municipal advocacy clearinghouse for the broker-dealer community.
This industry coalition, led by the Bond Dealers of America, is committed to advancing proposals that improve the municipal securities market while protecting the interests of taxpayers, investors, and state and local governments.
The threat to the tax-exemption is real, and so is the opportunity to get in front of the debate and remind lawmakers of the importance of munis. The time is ripe to not only promote the tax-exemption, but also make the case that the elimination of advance refundings was a policy mistake, and what better time to correct the mistake than when Congress reevaluates the TCJA?
Let's not let this looming threat turn into a reality.
