President Biden and a select group of senators have reached a bipartisan agreement on a $1.2 billion legislative proposal that targets the president’s physical infrastructure proposal. In this blog, we assess the impact that this legislation can have on the municipal market if it passes, as well as the effect of a potential second $1.8 billion infrastructure bill that largely targets human capital investments. While political forces could alter their course, we believe that passage of these infrastructure bills would have a positive impact on the municipal market.
If enacted into law, taxes for high income earners are likely to increase, which could fuel additional demand for tax-free municipal bonds, particularly in high tax states. Additionally, if corporate taxes are increased as part of the funding sources, demand from corporate buyers is likely to rise as well. The attractiveness of tax-exempt income from certain municipal issuers will only increase in our view.
It’s also very likely that Congress would reintroduce a program that mirrors the previous Build America Bonds (BABS) program. BABS was introduced in 2009 by President Obama to help stimulate the economy and increase jobs by allowing state and local issuers to sell taxable municipal bonds for capital projects. In return, the federal government subsidized a portion of the interest costs via either tax credits to the investor (tax credit BABS) or directly to the issuer (direct payment BABS). This legislation would follow the direct payment methodology. While the income earned on BABS is subject to federal taxes, this program could provide expanded investment opportunities for the growing universe of investors seeking taxable municipal investments. Additionally, this program helps issuers address their needed capital investments in a cost-effective mechanism via the subsidy payments from the federal government. We believe a program of this type would be favorable for the municipal market. The legislation is also calling for private activity bonds and public-private partnerships, both of which could result in more municipal debt being sold in the market.
We continue to closely watch to see if the reintroduction of tax-exempt advance refunding legislation is attached to any of these legislative proposals. The Trump administration’s elimination of tax-exempt refundings resulted in issuers selling refunding debt in the taxable market, which is more expensive. If municipal issuers are allowed to refinance their outstanding debt via the tax-exempt market, we could see an increase in tax-exempt debt sales.
In short, we believe infrastructure legislation would provide investors with new and expanded investment opportunities and issuers with additional opportunities to issue debt in a cost-effective manner.