If you heard a loud exhale recently, it was probably the sound of relief many felt after the House budget bill left the tax-exemption on municipal bond income intact.
The bill, which passed the House by a one-vote margin last week, is now being considered by the Senate, where the budget debate will likely “start nearly from scratch again with senators waiting to make sweeping changes to the legislation,” the Bond Dealers of America said.
Still, avoiding the ax was a significant feat. The decades-long exemption “was on every Republican hit list leading up to and after the election,” said Chuck Samuels, counsel to the National Association of Health & Educational Facilities Finance Authorities, according to The Bond Buyer.
Indeed, it was explicitly targeted to make up for trillions of dollars worth of proposed tax cuts.
Targeted in committee report
As we noted, ending the exemption was one of scores of revenue-generating ideas packed into a 51-page House Ways & Means Committee report earlier this year (“13 Words That Could End the Muni Exemption”).
This, despite the fact that eliminating it would raise only a fraction of the funds needed to offset the tax cuts and at the same time increase the costs of funding public infrastructure.
Supply, demand and credit looking up
Meantime, municipals supply and demand are robust, while muni credit, according to Nuveen, is strong.
Analysts expect at least $100 billion of tax-exempt principal maturities through the summer, yet yields are still juicy, “not far from where they have remained since the end of April: 4s and 5s available at or near par at longer maturities helps ensure sufficient retail demand for all the supply,” Matt Fabian, a partner at Municipal Market Analytics, told The Bond Buyer.
Recently, the tax equivalent yield on 30-year A-rated bonds for those paying the 40.8% tax rate was a whopping 8.55%.
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Not over, but relief
To be sure, the threat to the exemption isn’t over. Key senators said the House bill will contribute to soaring federal deficits and they will look to raise revenue.
“Congress will find its ability to spend more money in need of offsets, and the tax exemption, although now more popular than before, is still one of the larger ones,” MMA said.
Nevertheless, the municipal market continues to perform as designed: Cities and states are using munis to fund critical community projects and the bonds are serving as a reliable, steady stream of tax-free income for investors.
What’s particularly notable now is the fact that municipals are available at yields not seen in years.