DC Insights – Quarterly Edition

With the midterm elections rapidly approaching, the electoral picture has become much clearer. The likelihood of the House of Representatives flipping from Democratic to Republican control remain high, while the Senate is more than likely to stay in Democratic hands, albeit with many races within the margin of error. It seems that a “Red Wave” at this time may not come to be.

The municipal advocacy community had lofty expectations for the Neal Chairmanship during the 117th Congress. Promising robust legislative action on munis, the House passed the LIFT Act which would have reinstated tax-exempt advance refundings, raised the Bank Qualified debt limit, created a new direct pay bond and expanded PAB usage as part of the Build Back Better package. The Chair publicly advocated for the package and munis provisions directly, but the provisions were removed in the Senate package that later became law.

While Democrats retaining the House brings a higher likelihood of Congressional action on key BDA priorities next Congress and ensure support of the tax-exemption, currently we do not believe the tax-exemption to be in danger in the 118th Congress regardless of who controls the Chamber. The BDA feels bonds are in a stronger position than at the beginning of the 117th Congress last year due to extensive advocacy and outreach from issuers, broker-dealers and all other market participants, however continuous education remains a priority including growing the House Municipal Finance Caucus to include more Ways and Means Members on both sides of the aisle.

But what will Leadership look like assuming a Republican victory and how will that dictate policy?

Kevin Brady, the longtime Republican Leader of Ways and Means is retiring at the end of this year, and his likely replacement has been far less antagonistic towards fixed income. Congressman Vern Buchannan of Florida is the likely heir-apparent to the Leadership post, but a challenge from Jason Smith of Missouri is also expected. Neither have been outspoken in support or against the tax exemption or co-sponsored legislation such as the reinstatement of advance refundings.

As noted, we feel that while the tax-exemption does not face an immediate threat next Congress due to the likely change in Leadership, and we do not expect any movement on other muni provisions next Congress in the House with a Republican flip in control. The House Committee on Ways and Means will likely focus more on oversight of the Biden Administration especially in early 2023 under Republican Leadership, cutting down on legislative advancement of key tax issues. The BDA plans to continue to grow relationships on both sides of the aisle and continue extensive advocacy and education campaigns ensuring all Members and staff understand the importance of the tax-exemption.

Much like the Neal led Ways and Means Committee, the Senate Finance Committee run by Ron Wyden is considered very friendly to municipal bonds, especially direct pay bonds. The Chair has sponsored legislation to revive direct-pay bonds in multiple Congresses, however in 2011 did raise alarm by proposing legislation that revoke municipal issuers tax exempt status to be replaced with direct federal subsidy to offset the cost of issuing taxable debt. This idea was roundly rejected by the issuer community, and the Senator has since turned his attention to strengthening the municipal market.

Under his watch, the Committee advocated for and succeeded in passing robust PAB expansion, however it should be noted that other key muni priorities that were included in the House Build Back Better package never advanced in the Senate.

If Republicans can pull off an upset in the upper Chamber, who is most likely to lead and what is their past position on bonds?

While Senator Crapo is the Ranking Member on the Committee, many believe he has his sights set on another term as Republican Leader on the Senate Banking Committee opening the door for Senator John Cornyn (R-TX) to potentially take the Chairmanship should Republicans retake the Chamber. While Mr. Cornyn was instrumental in preserving PABs in the 2017 Tax Cuts and Jobs Act, he rarely speaks out in favor or against bond financing. With that being said, it would not be extraordinary to see some favorable fixed-income legislation be deliberated under his Leadership.

The BDA feels that municipal bonds will continue to be viewed in a favorable light regardless of which party runs the Senate Finance Committee, however progression beyond the Senate of key muni legislation will be hard to accomplish under the likely divided government scenario.

Gridlock is likely to return to Washington with the House more likely to flip to Republican control than the Senate. Gridlock means that the status quo will remain for the following two years, however the BDA continues to monitor any change in sentiment for the tax-exemption and we plan to do extensive advocacy and education efforts on Capitol Hill in the 118th Congress to ensure the benefits of munis are well known throughout the Halls of Congress and that they remain the centerpiece of infrastructure financing nationwide going forward.