Municipal Debt and Potential Impact of the Trump Presidency
Dec 16, 2016
While much of the country has been following the announcement of President-Elect Trump’s Cabinet nominees, the NYMuniblog has been looking at how the Trump Presidency may affect municipalities. The first issue being infrastructure and its effect on municipal budgets, and we now turn our focus to municipal debt.
In the week after Election Day, it was reported that mutual funds and exchange-traded funds lost approximately $17.7 billion in value. This drop was due, in part, to municipal debt investors’ focus on short-term bonds until any new tax and fiscal policies became clearer. If the incoming administration lowers tax rates, the exemption from federal, state and or local tax may lose its appeal to those in the higher tax brackets, or so conventional wisdom holds. If tax rates are lowered, and if those lower rates result in weakening demand for municipal debt, then interest rates on those debt issuances may be driven higher so as to, once again, attract investors.
Equally of concern to municipalities are other changes to the tax code which may be enacted in order to offset some of the reduced revenues to the Federal government. For example, an overhaul of the tax code could result in a reduction, if not elimination, of the tax-exemption on municipal bonds. Previous attempts to tax the income on municipal bonds have failed in Congress, including an effort in 2010 as part of the Simpson-Bowles deficit reduction commission report. In 2015 alone, the tax exemption on municipal bond income is estimated to have cost the Treasury $47 billion.
As a reaction to anticipated changes to the tax code in the Trump Presidency, various groups including the National Association of Counties, the National Governors Association, the Government Finance Officers Association, and the National League of Cities urged Congress the to protect the tax-exempt status of municipal bonds. According to the National Association of Counties, borrowing costs to states and local governments would increase by $500 billion should the exemption be removed.
And when considering how personal income taxes will be affected under the Trump Presidency, the Wall Street Journal recently reported that Treasury-nominee Steven Mnuchin has said that higher-income households “won’t receive an ‘absolute tax cut’ under the Trump tax plan”.
What tax code changes, if any, are proposed and enacted during the Trump Presidency will of course ultimately impact the attractiveness of tax exempt municipal debt. How municipal obligations will be treated, whether the same as currently treated for tax purposes or different, remains to be seen. Municipalities concerned that changes to the tax code are likely may wish to consider accelerating debt issuances, whereas those municipalities which believe changes are unlikely will likely not consider any changes to their upcoming debt issuances.