CHICAGO – Market participants should be wary of threats to tax-exempt bonds, but the politically-charged atmosphere in Washington, D.C. raises doubts about the ability of Congress to pass comprehensive tax reform legislation, lobbyists and others said Friday.
Speaking at the Bond Dealers of America’s 2012 National Fixed Income Conference here, Ellen Marshall, principal at Washington-based government relations firm Marshall & Co., questioned whether Congress will be willing to consider the “solid policy arguments” needed to overhaul the nation’s tax laws.
“Everything is very politically-driven and motivated. It is going to make it very difficult for Congress to do a comprehensive overhaul of the tax code,” she said.
Congress may succeed in changing corporate tax rules, but will have trouble agreeing to changes that affect individuals’ taxes, Marshall said. That’s partly because, unlike during the tax reform debate in 1986, information today flows instantly to the public through the Internet and 24-hour cable news channels.
Debates among lawmakers that used to take place privately are now increasing made public. Marshall said details about tax discussions in the House Ways and Means Committee and Senate Finance Committee are bound to be leaked to the media.
“It’s hard to talk amongst each other and really reach an agreement,” she said.
Information and misinformation will quickly reach constituents, she suggested.
“The prospect of getting hundreds of thousands of emails and phone calls and postcards from your constituents … is not something that a lot of members of Congress want to face,” Marshall said.
President Obama and presidential candidate Mitt Romney have both floated tax and budget proposals that concern muni market participants.
While Obama has advocated re-establishing the Build America Bond program with lower subsidy rates, he has also proposed a 28% cap on the value of tax-exempt interest for wealthier taxpayers.
Romney has said he plans to close tax loopholes and eliminate certain tax preferences, but has not provided details. However, his critics think he cannot lower tax rates across the board by 20% and lower the federal deficit without making drastic cuts in tax expenditures.
Other threats include deficit reduction commission proposals to eliminate tax exemption for all or certain new muni bonds, and pending legislation that would make all new muni bonds taxable, tax-credit bonds.
Another speaker at the conference on Friday, John Miller, managing director and co-head of fixed income at Nuveen Asset Management LLC., said “radical tax reform will be extremely difficult” regardless of who wins the election.
The federal government may be more divided after the election because moderate members of Congress may lose their seats to more partisan newcomers, Miller said.
He also doubts lawmakers will consider the muni-bond tax exemption to be a “loophole.”
“When [politicians] say, ‘We have to close some of these loopholes,’ they are talking about carried interest or accelerated depreciation,” Miller explained. Tax exemption for muni bonds, which help finance infrastructure, is a “whole different category and should not be called a loophole,” he said.
Still, speakers said the muni community must carefully monitor the tax debate.
“In the grand scheme of things, everyone should consider themselves at risk right now,” said Marshall. “Every tax credit and tax exemption will be under examination.
Regulations affecting the municipal market, including the Volcker Rule, also dominated the discussions Friday.
BDA senior vice president of government relations Susan Collet said the House Financial Services Committee plans to hold a hearing after the November elections to discuss the Volcker Rule, which would prohibits banks from proprietary trading and would restrict their investments in private equity and hedge funds.
Committee chairman Rep. Spencer Bachus, R-Ala., has requested input from the financial industry on how the Volcker Rule should be shaped, and how the rule’s so-called “market-maker” exception should be defined, Collet noted.
BDA and other market participants have advocated for municipal bonds to be exempt from the Volcker Rule.