November 10, 2016
U.S. MUNICIPAL BOND MARKET
Tom Kozlik
Transition of Power
[email protected]
215-585-1083
What the Results of the 2016 Election Mean for the U.S. Municipal
Bond Market
Introduction
The transition of power of the executive branch of the U.S. government will occur again January
20, 2017. Donald J. Trump will raise his right hand and be sworn in as the forty-fifth president of
the United States. That peaceful transition in and of itself is a marvel, but this time the steps
ahead also include more uncertainty than financial and municipal bond market participants and
observers have come to expect.
Summary
There remains only a limited amount of information about how President-Elect Trump plans to
attain his campaign’s goals and fulfill the visions that won over voters. Not much tells us what his
policy and budget priorities are going to be (tax policy, immigration, cyber-security, tax reform,
etc.). Clarity on policy will come in coming weeks and months, especially as his administration
prepares to release their budget at the beginning of February. On the surface, Trump’s tax policy
proposals appear to be a negative for municipal bonds. "How negative?" is the key question. They
could possibly face a difficult path despite the fact that Republicans kept control of both the
Senate and the House of Representatives. His proposals related to infrastructure are not likely to
increase the amount of U.S. infrastructure that is “built by bonds” because his focus is on tax
credits for private companies.
Tax Policy Proposal
The President-Elect’s tax plan is meant to generally reduce income and corporate taxes. He
proposed to reduce individual income tax brackets from seven to three.
Proposed Brackets and Rates for Married Joint Filers
Less than $75,000: 12%
More than $75,000 but less than $225,000: 25%
More than $225,000: 33%
The Trump tax policy plan also proposes to lower the business tax rate to 15% from 35%. These
policies are very close to those presented by House Republicans in the summer of 2016. These
and other tax policies are expected to help grow the economy but they could also be a net loss for
federal revenues at current levels.
Impact of Tax Policy on Municipals and Likelihood of Passage
This tax policy proposal, if enacted, is likely to reduce overall demand for tax-exempt municipal
bonds. It is difficult to determine exactly the magnitude of the impact, but generally lower levels of
taxes would lessen the relative value of the tax-exemption. While the Republicans have control of
both the Senate and House of Representatives, the GOP does not have the 60 votes in the Senate
they would need to stop Democratic filibusters in the Senate. The lack of 60 votes could possibly
bring Senate Democrats into play as the Senate remains divided. Therefore, tax policy is going to
be subject to deal-making between Trump and Congress. Typically the president releases his
budget proposal in early February. This spending plan and the results of the budget negotiations
will give us a better indication of what is likely to occur on the tax policy front in the near term and
whether political roadblocks can be overcome. President-elect Trump will need to develop
priorities and work with Congress to pass a budget plan. How close the tax policy looks to the
above remains to be seen.
On the surface, Trump's
tax policy proposals
appear to be a negative
for municipal bonds.
2
Infrastructure Proposal
The Trump Infrastructure “Vision” lacks details but a “Trump Versus Clinton on Infrastructure”
analysis by Trump senior policy advisors offers some insights. It calls for $1 trillion worth of
projects over 10 years. The key component of Trump’s infrastructure plan is a private-sector tax
credit described as being revenue neutral. They use the term "revenue neutral" because the costs
are expected to be paid over time by incremental tax revenues that grow as a result of the
projects. As it reads, it is unlikely the majority or even much of the Trump infrastructure will be
“built by bonds.” All things being equal, new money tax-exempt bond issuance is not likely to be
much higher in 2017 whether the proposed infrastructure policy is instituted or not. The Trump
infrastructure analysis is neutral to slightly positive on Build America Bonds (BAB), but does not
go so far as to propose a renewed BAB-like product. His advisors also note “problems” with the
tax-exempt financing approach. This could be signaling a lack of support for the municipal bond
tax exemption.
The key component of
Trump's infrastructure
plan is a private-sector
tax credit described as
being revenue neutral.
Upcoming Calendar for Washington, D.C. Lawmakers
November 14, 2016—Congress begins lame duck session.
November 21-25, 2016—Thanksgiving recess for Congress.
December 9, 2016—Continuing Resolution funding expires. Congress expected to extend into
early 2017.
December 19-January 3, 2017—Congress adjourns- depends upon when a Continuing Resolution
agreement is reached.
January 3, 2017—The 115th Congress is sworn in.
January 20, 2017—Inauguration Day.
Early February 2017—The President usually releases a federal budget proposal on or before the
first Monday of February. This could be delayed, which would also likely delay the State of the
Union address.
Mid-late February—President Trump would likely give his first State of the Union address.
The President usually
releases a federal budget
proposal on or before the
first Monday of February.