Bonds

Reconciliation bill expands, but muni priorities still left out

There are no happy surprises for the municipal bond market in the surprise budget reconciliation bill unveiled by Sen. Chuck Schumer and Sen. Joe Manchin Wednesday night.

As has been the case with the last several iterations, the legislation fails to include any muni market wishes, like tax-exempt advance refunding. And the bill continues to feature a 15% alternative corporate minimum tax that some warn would hurt demand for tax-exempt munis.

The measure also does not propose a revamp of the state and local tax deduction cap, a provision that’s important to many issuers, especially high-tax states like New Jersey and California.

“We are disappointed, but not surprised, that no muni provisions appear to be in the Schumer/Manchin agreement,” said Brett Bolton, vice president of federal legislative and regulatory policy at the Bond Dealers of America. “We remain concerned about the corporate minimum book tax and its potential impact on muni holdings. We will continue talking with the Hill about this potential problem and call on Congressional leaders to find a solution.”

West Virginia Democrat Sen. Joe Manchin surprised even Democratic colleagues when he announced a long-elusive deal with Senate Majority Leader Chuck Schumer on a budget reconciliation bill.

Bloomberg News

The window for negotiations is not completely closed, said Emily Brock, lobbyist for the Government Finance Officers Association.

“The general consensus is that lots of folks were caught by surprise by the deal, and I think there’s still a bit of negotiating to go,” Brock said. “I think it gives us a very short amount of time to work with our Democratic champs to emphasize what is important for our market and how things like advance refunding and small issuer exception (bank-qualified) could have a lasting impact for communities across the country.”

Manchin’s long-elusive support comes only a few weeks after the West Virginia Democrat said he would support only a pair of health-care related provisions in the legislation. Manchin has been at the center of months-long negotiations over the spending bill, passed through the parliamentary process known as reconciliation, that would enact President Joe Biden’s campaign promises and boost Democrats heading into tough midterm elections.

The White House announced shortly after the Manchin/Schumer deal went public that Biden supports it.

“That a deal has been reached is somewhat of a surprise,” said Charles Samuels of Mintz Levin, counsel to the National Association of Health & Educational Facilities Finance Authorities.

“Not surprising is that at this point there are no muni bond provisions and in fact there may be a deleterious corporate minimum tax. I think the impact of that is still TBD. Efforts certainly will be made to add our provisions and literally hundreds of other provisions. We’ll see if this new deal succeeds and where it ends up.”

The bill, called the Inflation Reduction Act of 2022, would invest $370 billion into energy security and climate change and $64 billion into a three-year extension of Affordable Care Act enhanced subsidies. Another $300 billion would go toward deficit reduction, according to a summary.

The bill is estimated to raise a total of $739 billion over 10 years. The 15% corporate minimum tax, which would apply to the adjusted financial statement income for corporations with more than $1 billion in annual income, is projected to raise $313 billion. By including financial reporting income, the provision would likely include tax-exempt income, and that may hurt muni demand. The proposal was one of the original revenue-raising measures back when the bill was called Build Back Better and totaled $1.75 trillion.  

Allowing Medicare to negotiate drug prices on some drugs would raise $288 billion. A proposal to boost IRS enforcement would generate $124 billion. Another $14 billion would be raised by taxing so-called carried interest, which applies to investment fund managers, as ordinary income.

As Morgan Stanley noted in an analysis Thursday, hurdles remain before the bill can be enacted: “it is unknown if sufficient Democrat Senators support the agreement [and] legislative text still needs approval by the parliamentarian to move through the reconciliation process.”

It’s unclear whether the bill will garner support from some Democrats, like Rep. Josh Gottheimer, who have said they would not support any deal that does not lift the $10,000 cap on state and local tax deductions. In a lengthy statement announcing the bill, Manchin repeated that he will not support a SALT revamp, saying “our tax code should not favor red state or blue state elites with loopholes like SALT.”

The bill is expected to come to the Senate floor next week. The Senate is set to recess for the summer on Aug. 5. The House leaves Friday, but House Speaker Nancy Pelosi has already said she would bring lawmakers back to vote on the bill.

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