With the omnibus having been passed by Congress, substantive legislative work will wind down until after the elections in November. There are, however, a few outstanding tax/financial issues to note.
First, as you may know, there are ongoing efforts in Congress to reclassify municipal bonds as high quality liquid assets (HQLA). Regulations mandating that banks hold a minimum amount of HQLA neglected to include municipal bonds in that category, even though they have a lower default rate than private sector bonds. The House passed legislation to reclassify municipal bonds as HQLA both last Congress and this Congress, but until recently the Senate had not. On March 14, the Senate passed a Dodd Frank relief bill, S. 2155, that included a provision to reclassify municipal bonds as HQLA. This is the first time that both chambers have passed HQLA language. Unfortunately, House Financial Services Chairman Jeb Hensarling (R-TX) at this point opposes the Senate Dodd-Frank relief bill; he believes it does not go far enough. What does that mean for muni bonds? It means that right now, they are caught in the House and Senate maneuvering on Dodd-Frank. Until those disagreements are resolved (either through a Conference Committee or by the House passing the Senate legislation), the HQLA legislation is on hold.
Second, the omnibus did include a solution to the so-called “grain glitch”, but only by including an expansion of the Low Income Housing Credit for Democrats. This agreement sets an informal precedent: fixes to the GOP tax law will only get Democrat support by including corresponding Democrat priorities. (Because of procedural rules in the Senate, fixes will need Democrat votes.) This could provide opportunities for Democrats to secure longer term extensions for renewable energy tax incentives like those for hydro- or geothermal power. But it also increases the cost of any fixes to the tax law, so tax-writers will have to find even more revenue to offset these fixes. This means that tax exempt municipal bonds could be back on the table—at the very least a haircut for top earners like Chairman Dave Camp or President Obama proposed.
TFG will continue to monitor this and other municipal bond developments. If you would like more information, please contact our team.