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The Washington Quarterly

DC Insights – Quarterly Edition

September 2023
The Politics of a Disfunction and the Impact on Muni Legislation

By Brett Bolton
BDA's quarterly federal legislative, regulatory and political report on policy impacting US bond markets.

Another budget cycle, and another near shutdown. This threat seems to be a heme in modern day politics in Washington, DC. However, this showdown led to an intra-party battle between House Republicans that has spilled into the open, bringing further chaos, doubts, and unknowns into the legislative process.
In late September, Speaker McCarthy avoided a shutdown by reaching across the aisle to pass a short term resolution funding the government through early November, circumventing the right flank of his party, and setting up a clash to save his Speakership. As you may recall, this is a similar outcome to that of the raising of the debt ceiling, which passed via a broad bipartisan vote in the House, and yet again alienating conservatives in the House.
Shortly following the passage of the short-term funding measure, a Motion to Vacate the Speakership was filed by Congressman Matt Getz (R-FL) and passed, throwing the House into a Leaderless void and setting up uncertainty in both the near and long term. Regardless of whomever takes the gavel next, the House Republican caucus will remain fractured, and at this juncture it is the unlikely alliance of House Republican Leadership, and the House Democratic caucus can last following the splinter during the Motion to Vacate proceedings—bringing doubt into future bipartisan legislating and likely heartache when government funding runs dry yet again this fall.
This leads to the question: Does this slam the door for further bipartisan deals including end of year tax packages this year, is the Congress capable of keeping the government open when the short-term spending deal expires in early November, and where do munis fit into any year-end tax conversation?
First things first: prospects for a year in tax bill in 2023 remain bleak and 2024, while slightly more attainable, is a presidential election year which minimizes opportunity for bipartisan legislation. However, the election may provide the opportunity for a potential lame-duck session of Congress where many tax issues are usually addressed.
But with the new injection of chaos into the legislative process, it may be time to turn attention beyond this Congress into 2025 where it the expiration of the 2017 Tax Cuts and Jobs Act (TCJA) may provide the first real opportunity for muni legislation advancement.

Shutdown Adverted but Political Crisis Found-What’s Next for Bipartisanship and Munis

Tensions remain on the Hill, and they will likely not dissipate anytime soon. While bipartisanship has allowed for cooler heads to prevail in certain instances, fractures in the Republican party continue to slow—even halt-- House legislating, and it seems that the Democratic lead Senate and House Minority is happy to sit back and watch the sideshow play out, resulting in very little hope of additional bipartisan (or any legislative) action this term.
This has not discouraged the BDA, or our friends in the broader Public Finance Network advocacy community in DC which continue to advocate for muni provisions and educate on the importance of the tax-exemption relentlessly. We continue to have conversations with key policy makers in both the House and Senate ensuring that the tax-exemption remains in a strong position and that other measures such as the restoration of advance refundings and raising of the bank qualified debt limit continue to gain steam.
While expectations for munis in 2023 are nearly non-existent at this point, and a lame duck package in 2024 an unknown, 2025 provides a great opportunity for Congress to debate key muni priorities.
As mentioned, the 2017 Tax Cuts and Jobs Act has many provisions set to sunset at year-end 2025. This was the package that eliminated tax-exempt advance refundings and nearly eliminated private activity bonds if not for extensive advocacy from the muni community. As time has passed, many Republicans have looked back at individual policy provisions in the TCJA package and agreed some may need alteration. This includes advance refundings which were eliminated to offset the cost of the total package, not as a policy position.
Legislation has been introduced this Congress with support of the BDA and PFN by House Ways and Means Republican Representative David Kustoff (R-TN) and longtime House Municipal Finance Caucus Chair Dutch Ruppersberger(D-MD) and has gained bipartisan traction in both the House and the Senate. It should be noted Mr. Kustoff voted in favor of the TCJA in 2017 and continues to make the argument that this correction needs to take place. The BDA remains optimistic that the groundwork is being laid for this correct to occur in the coming years.
Beyond advance refundings, we expect robust debate on both the personal and corporate tax code and believe that low-cost provisions such as the raising of bank qualified debt face a fair shot at consideration and continue to work with our friends on the Hill to reintroduce this legislation.

Outlook 2025

The BDA continues to eye the tax battles of 2025 as the best opportunity for advancement of several key muni priorities, while still educating the Hill and pressing for quicker action. However, many pitfalls remain including the chaos that is currently happening on Capitol Hill.
We believe that both parties will continue to shift efforts from direct federal funding, putting more emphasis on alternative financing measures that cost little to the federal government, setting up the increased need for state and local financing tools. Simultaneously, many expect Congress to begin looking at tax expenditures as deficit cutting measures highlighting the need for continued education and direct advocacy highlighting the importance of the tax exemption.
While we believe it is an uphill battle, the opportunity for advancement of municipal bond provisions should find traction in 2025. Muni advocates finally have a foothold on both sides of the aisle in key tax writing Committees—House Ways and Means and Senate Finance—setting up the potential for advancement in a bipartisan fashion.
This does not diminish the need for continued advocacy and education efforts on the Hill, including regular fly-in’s allowing the BDA to spotlight our membership of experts in the muni market. These events are key in ensuring policy makers understand the importance of muni financing for our nation’s infrastructure.