Muni advocates are gearing up for a contentious tax fight next year, particularly if Kamala Harris should prevail in the presidential election, as Congressional Republicans are already digging in with a nationwide tour preemptively attacking the tax policies of the current Vice President.
On Tuesday, Rep. Jason Smith R- Mo., Chairman of the House Ways and Means Committee, stated clearly the opening position of the committee on tax policy relative to the election.
“I appreciated the opportunity to meet with local job creators in my home state of Missouri to hear their perspectives on how disastrous the Biden-Harris tax hikes would be and discuss how Congress can build on the success of the Trump tax cuts in 2025 to not only prevent the Democrats planned tax increases, but also deliver real relief to workers, families, and businesses,” he said.
The comments came during the latest of the Committee’s over 100 field trips spread across 18 states designed to solicit public comment and provide headlines about the future of the Tax Cuts and Jobs Act.
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The Committee has been chewing over the provisions of the TCJA through five, Republican-only Tax Teams that were formed last April.
Lobbying efforts are ongoing by targeting select teams, members and issues as opposed to waiting to see who wins in November. “We are not in a wait and see mode,” said Brett Bolton, VP at Bond Dealers of America.
“BDA muni leadership earlier this summer did a D.C. fly-in with Community Development Tax Team Members including its Chair Rep. Kelly discussing these important issues, as well submitted comments recently to the Committee reiterating our support for muni legislative priorities.”
The TCJA eliminated the advance refunding of tax-exempt bonds and put a cap on the deduction of state and local taxes, two key issues for the muni market that could be changed once the election results are final.
The deduction for SALT is currently capped at $10,000. Several stalled bills in both houses of Congress seek to raise the cap or eliminate it entirely.
The cap is perceived by many as a strong revenue tool for the federal government while bond issuers believe it infringes on their sovereign ability to levy future taxes.
Smith outlined the baseline for his views on changes to the SALT cap during an interview on CNBC in late September.
“There’ll be a cap on SALT,” he said. “There is no way in a Republican House of Representatives that you can pass an unlimited SALT deduction.”
Smith believes the cap will be increased and marriage penalty will also be addressed. The cap currently applies equally to single and joint filers.
“Republicans are supposed to be the party of families. There should not be a marriage penalty,” he said.
The muni market is especially concerned that budget tightening in the next Congress could focus on the elimination of tax-exempt bonds. According to the non-partisan Congressional Budget Office, extending all the TCJA tax cuts is expected to add $4.6 trillion to the budget deficit.
“We’re going to look at everything,” said Smith. “There’s not one thing that can pay for $4.6 trillion. I also believe there’s some deductions that we should be getting rid of.”
Even if the Democrats prevail in the House, and committee leadership changes, concerns remain for market leaders.
“When I hear about the fiscal impact of policies from either VP Harris or former President Trump the impact is typically one that adds to the current fiscal weakness,” said Tom Kozlik, managing director, head of public policy & municipal strategy, Hilltop Securities.
“This adds to the threat to the municipal bond tax exemption.”
Smith mimicked Trump’s go-to answer about pay-fors by leaning on the possibility of hiking tariffs, calling out Section 301 sanctions that targets electric vehicles, solar panels, and EV battery imports from China. The Biden administration proposed boosting the tariffs in May, a move that was finalized in mid-September.
Economists typically point out that tariff costs are passed through to consumers which in turn affects markets.
“I would anticipate an even more severe depression of equity prices under the more extreme tariffs Trump is now proposing, again by contributing to a general environment of uncertainty and by directly reducing expected profits of affected firms,” said Erica York, senior economist, for the Tax Foundation.
Smith side-stepped questions about changes to the corporate tax rate, which was reduced to 21% from the 35% by the TCJA. The law also nearly doubled the basic standard deductions which the Biden administration has vowed to keep in place.
“Policies that increase tax rates would enhance the value of tax-exempt bonds, and this could lead to increased demand.,” said Kozlik.