Washington Politics Unlikely To Have A Near Term Impact On Municipals

Representative Paul Ryan revealed his fiscal 2015 budget plan on Tuesday, calling for lower individual and corporate tax rates. The budget outlines a plan for two income tax brackets for individuals of 10% and 25% and a lower corporate tax rate of 25%. In his proposal, Ryan leaves all tax expenditures on the table for reform, including the tax-exemption of municipal bond interest. This approach is similar to the tax reform outlined in February by Dave Camp, the Chairman of the House Ways and Means committee. Camp’s draft of tax reform legislation would put a cap on municipal bond interest exemptions at 25% and eliminate the  tax exemption for new issues of qualified private-activity bonds and advance refunding bonds issued after 2014. Both Ryan’s and Camp’s proposals could have direct impacts on the municipal bond market. Lowering the top tax rate for individuals to 25%, as Ryan has proposed, and capping the tax exemption for municipal bond interest, as Camp has proposed, would make tax-exempt municipal bonds less attractive to investors. In turn, it would become more expensive for state and local governments to issue debt because investors will require higher yields to offset the effects of this tax reform.  Ryan’s proposal will reach the House Budget Committee this week for consideration, but likely will stop there. Senator Patty Murray, the Senate Budget Committee chairman, has said that she will not propose a budget resolution for fiscal year 2015.  These types of proposals have consistently made their way through Washington over the years, but little has actually been done on reform.  Given the political climate heading into an election year, this is likely to be the case again, leaving the odds of municipals being negatively impacted quite low.