On November 2, the House Ways and Means Committee did release their tax reform proposal and it will have, as written, implications for the municipal market. But as we all know, this proposal is far from being written in stone.
So what are some of the proposals that impact the municipal market? Well, lowering the number of tax brackets down from seven down to four. You have the top corporate rate dropping from 35% down to 20%.
You have the elimination of the alternative minimum tax. You have the elimination of the state and local tax deduction on your federal return, which would impact high-tax states.
You have the elimination of advance refunding bonds, which is basically a mechanism for municipalities to lower their bonding costs. And you have the elimination of private activity bonds and 501©3 or not-for-profits, which are basically taking out roughly 25% of the issuance in the municipal market.
If all of that went through, which we think is highly unlikely to go through because it runs counter to what the administration is trying to accomplish in terms of lowering healthcare costs and increased infrastructure spending, you would likely see less supply in the municipal market, which would likely drive up the price of municipal bonds.
But this is far from a done deal. This is a lot of disruption for a little benefit and the benefit over the next ten years amounts to roughly less than $60 billion when you’re trying to cover over a trillion-dollar tax proposal. So, not a lot of gain for a lot of disruption.
In this uncertain environment, investors should demand from their municipal bond manager that they have flexibility, it’s as simple as that. Have flexibility to navigate around an uncertain market. Whether that flexibility is navigating into taxable bonds, whether it is owning single A or BBB-rated bonds, municipal credit, or owning high-grade bonds. Whatever it may be, investors should demand that their municipal bond manager have that flexibility.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.