Tax Cut Package Largely Spares Municipal Bonds
The U.S. Senate and House of Representatives passed the conference committee version of the Tax Cuts and Jobs Act, and President Trump’s signature is all but certain. The final package was far kinder to municipal bonds than the original legislation passed by the House. Specifically, the adopted legislation does not change the treatment of Private Activity Bonds (PABs). This is important for the municipal market, meaning that upwards of 30% to 40% of annual supply will remain tax-exempt. Other changes will likely have only limited market effects.
Some changes are permanent while others have scheduled sunsets. At sunset, the legislation reverts to prior tax law, which includes higher individual tax rates and lower income eligibility for those rates. In all cases, changes to the tax treatment of municipal bonds applies only on a going-forward basis; no presently outstanding municipal bonds will see a change in tax treatment resulting from this legislation.
Other provisions that directly and indirectly influence the market will not, in our view, have a significant effect on municipal bonds. The balance of this paper focuses on the various aspects of the tax cut legislation as it relates to the municipal market.
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