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The Washington Quarterly

DC Insights – Quarterly Edition
Muni Outlook: Election 2022
July 2022

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

As we head towards the November midterm elections, the electoral picture is beginning to come together. It seems that both Chambers of Congress are likely to flip from Democratic control to Republican, but in this volatile political environment, will past be prologue and how will these likely changes in control impact tax policy, specifically municipal bond related legislation?

Electoral Outlook
Over the past century, history has shown that the majority party loses a sizable amount of seats in the midterm elections, often enough to flip control of the House and sometimes the Senate. With a multitude of headwinds such as soaring inflation and lagging presidential approval ratings, odds are that both Houses of Congress will flip to Republican control.
According to FiveThirtyEight, in the 19 midterm elections between 1946 and 2018, the president’s party has improved upon its share of the House popular vote just once. And since 1994, the president’s party has lost the national House popular vote in six out of seven midterm elections — usually by similar margins of 6 to 9 percentage points.
If this historical trend continues, Republicans are a near lock to take over the House where they need to flip a handful of seats. And in the Senate, which currently is evenly divided 50-50, even with a favorable map for Democrats, the headwinds and trends may be too much to overcome.
While the Senate is far from a lock, at this time the BDA predicts that both Chambers of Congress will flip to Republican control, likely leading to a tough policy environment heading into the 2024 Presidential election.

Muni Watch: What Opportunities if Any in Divided Washington?

While the muni community as a whole had high hopes for single party control following the 2020 elections, many priorities remain on the wish list. The past 2 years have brought robust spending , working to alleviate potential state and local budget shortfalls following the COVID pandemic and the lockdowns that ensued, as well the $1 trillion dollar bipartisan Infrastructure and Investments Act which provided nearly $500 billion in new spending and vastly expanded private activity bonds.
However, key provisions such as the reinstatement of tax-exempt advance refundings, raising the BQ debt limit, and a new direct pay bond exempt from sequestration remain outstanding. What impact, if any will a change in Committee leadership and direction have on these BDA priorities? House Outlook Over the past decade, several attempts to curtail the tax exemption or change the tax treatment of fixed income tools have emerged from the House. From the deficit reduction plans in the early 2010's, to efforts during the Tax Cuts and Jobs Act (TCJA) debates of 2017 in which the House attempted to eliminate PABs and succeeded in barring tax-exempt advance refundings, House Republicans have been more willing to use the tax-exemption is a possible means of debt reduction. This threat remains, however, due to extensive advocacy from the muni community, the caucus, and especially the Republican contingent sitting on the House Committee on Ways and Means have become more friendly towards the tax-exemption in the past decade. While leadership roles for the Committee have yet to be decided, Ranking Member Kevin Brady (R-TX) plans to retire leaving the potential Chairmanship up for grabs. Beyond the change in Chair, there are a few key names to watch in the coming year: - Rep. David Kustoff (R-TN) a close ally to the BDA, recently was reassigned from the House Financial Services Committee to the House Committee on Ways and Means. Mr. Kustoff has long been a fixed income advocate, and his presence on the tax writing Committee in the years ahead may prove invaluable. - Rep. Jackie Walorski (R-IN) last year become the Co-Chair on the House Municipal Finance Caucus, a key group that consistently introduces legislation that addresses BDA and the broader issue community priorities. Senate Outlook. Senate Finance has long been in strong support of muni finance policy. Both parties have proposed and delivered legislation, typically in a bipartisan fashion. As well, the Senate Committee on Finance Republicans also protected provisions such as private activity bonds during the TCJA debates of 2017 and many of these champions remain veteran Members of the Committee. The Committee will likely be Chaired by Senator Mike Crapo (R-ID) if Republicans regain power. Mr. Crapo has long had a favorable outlook of fixed income co-sponsoring legislation in past to increase the BQ Debt limit and last year pressed for the expansion of PABs. Other names to watch include: - Senator John Cornyn (R-TX) was a key ally during the 2017 tax reform. Mr. Cornyn publicly defended private activity bonds on numerous occasions, and worked to ensure they were unchanged in the final package. He has also sponsored and cosponsored legislation this Congress to increase bond usage. - Senator Roger Wicker (R-MS) this Congress has introduced bipartisan legislation that would reinstatement municipal advance refundings and create a new direct-pay bond exempt from sequestration, the American Infrastructure Bond.


Often, a change in power in the halls of Congress results in an abrupt 180-degree shift in direction and tone, and if the BDA prediction is correct--we expect this trend to continue. This is not to say no meaningful policy debate will take place, instead robust bipartisan action will be needed little political will to accomplish this remaining on either side of the aisle.
As noted above, we do not believe there is an immediate threat to the tax-exemption in the coming years, in fact muni bonds will find support in both Chambers and in both parties due to extensive advocacy from the muni community. However, continued extensive education efforts will be needed to continue to grow the knowledge and support on the Hill ensuring support for the tax-exemption remains steadfast here in Washington, DC.