Amid ongoing debate over major changes to the tax code, tax-free bondholders received clarity: The Senate doesn’t plan to eliminate the long-standing tax exemption on municipal income.
The omission from the Senate Finance Committee’s sweeping tax and healthcare bill last week mirrors the decision last month by the House to also preserve the exemption (“Muni Exemption Survives House Bill”).
State and local officials, investors and many others were rattled earlier this year when a House committee raised the possibility of ending the exemption (“13 Words That Could End the Muni Exemption”).
While tax-free bonds have been in the crosshairs of leaders before, many analysts felt this might be the year it was axed, as Congress and the Trump administration look for ways to pay for trillions of dollars in tax cuts.
Munis finance most infrastructure
Too often, the exemption debate obscures the critical role of muni bonds in the everyday lives of Americans.
“There is no doubt that the bulk of the cost to provide infrastructure supporting communities across the country is born at the state and local levels,” the Government Finance Officers Association said, “and tax-exempt municipal bonds are the primary tool to make it happen.”
About two-thirds of the nation’s core infrastructure is financed with municipal bonds. They support a wide range of projects, including schools, hospitals, seaports and bridges.
For investors, that means muni bonds remain essential not just for stable tax-free income, but for supporting the backbone of American communities.
A typical scenario was outlined recently in an article in The Bond Buyer, with the headline: “Small-town Michigan deals underscore munis’ role in water infrastructure.”
The article examined necessary water system improvements in Albion and Northville, Michigan, financed by municipals. In fact, a state official told the publication Michigan is receiving “record-setting asks” for infrastructure upgrades.
Albion, a city of 7,300, is looking to attract manufacturers to an industrial park and issued $10.7 million of bonds. Proceeds will help finance a new elevated storage tank to help ensure sufficient water to pump in the event of a major fire and improve the area’s water treatment, transmission and distribution.
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The city of Northville, northwest of Detroit, which sold $14.06 million in tax-free bonds, also plans various water system improvements. They were prompted by a state-required study that called for decommissioning an underground reservoir, building a new booster station and making other improvements over the next five years.
For investors, these projects help illustrate why the exemption continues to have bipartisan support and why preserving it matters.
Impact across the country
While we can’t predict future legislation, we do know the impact of municipal bonds is felt in every legislative district across the country, from water systems in small towns to massive underground tunnels in big cities.
The municipal bond market has performed as intended for decades, so we’re not surprised that attempts to disrupt it provoked a backlash.
We are pleased legislators made the right decision, and the way our clients are reacting – particularly in this elevated-yield environment – they are pleased as well.