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The Washington Quarterly
Muni Outlook 2024: Can Congress Lay the Groundwork for Tax Reform in 2025?
Muni Outlook 2024: Can Congress Lay the Groundwork for Tax Reform in 2025?
By Brett Bolton
BDA's quarterly federal legislative, regulatory and political report on policy impacting US bond markets.
By Brett Bolton
BDA's quarterly federal legislative, regulatory and political report on policy impacting US bond markets.
With minimal tax legislation advanced in the first session of the 118th Congress, many in DC are now turning attention beyond 2024 into 2025 when the expiration of a vast swath of the personal tax-cuts from the 2017 Tax Cuts and Jobs Act sunset on December 31st, 2025.
With a Presidential election, and control of both Chambers of Congress to be on deck in 2024, many unknowns remain and the outlook for renewing the TCJA look murky at best. The unknowns provide opportunity for advancement of key-muni legislation, while also putting the tax-exemption in the crosshairs, igniting the need to tout the benefits of the tax-exemption to avoid an effort to curtail the tax-exemption to pay-for the tax cut extensions.
The BDA continues to lead industry efforts in protection of the tax-exemption, working in concert with the broader issuer community as an active participant in the Public Finance Network (PFN), a group of over 25 DC based advocacy organizations led by the Government Finance Officers Association.
This coalition has helped grow support for the tax-exemption and grown and has strength since the Tax Cuts and Jobs Act of 2017 (TCJA) eliminated tax-exempt advance refundings and questioned other municipal finance tools. The support and effort from this community cannot by understated.
However, danger lurks in the coming years as the 2017 TCJA is redebated with a plethora of tax provisions set to expire on December 31st, 2025.
As noted, the tax-exemption has strong support in both Chambers and in both parties, however it remains a top-10 tax expenditure for the federal government—making it a potential target to use as an offset for additional spending as concerns continue to grow on the debt and annual deficit.
We also have continued concerns around provisions such as Private Activity Bonds (PABS) due to their shaky status on the Hill after the House voted to eliminate in their version of the TCJA, to be saved by Senate Republicans.
Tax Reform Outlook:
In the most likely scenario, the TCJA will be debated with a divided government. With the White House up for grabs in 2024, it is more than likely that each party will control a Chamber of Congress in the 118th Congress with Democrats likely controlling the House and Republicans the Senate, setting up the need for compromise and debate on the potential and politically popular personal tax cuts.
While initially lowering taxes is a heavy and often partisan exercise often favored by Republicans, allowing tax cuts to sunset--especially personal income tax cuts--will most likely bring a large contingent of Democrats into play as it is politically untenable to allow middle class tax cuts to sunset.
To make this a bipartisan package, we fully expect concessions to be made. Provisions such as the cap on state and local tax deduction (SALT) will be in play, as will rates for the wealthiest Americans. But provisions such as SALT come with a hearty price tag. The CBO estimates that eliminating the SALT cap will cost the federal government north $900 billion over a decade, a price tag that likely cannot be offset with raising rates on certain income levels minimally.
While munis remain in a strong position, the BDA is planning to ramp up advocacy activities leading up to the TCJA debates of 2025 including a revamping of the Municipal Bonds for America coalition, coalescing the buy-side with BDA firms and beyond.
The time for industry action to protect these key financing tools is now, and the BDA plans to continue to lead the industry response in protection of munis.