Bonds

The public finance community is often disappointed with the limited scope of municipal bond proposals laid out by the White House in its annual budget and policy recommendations.

But this year, for the first time in recent history, Treasury’s so-called Green Book, which contains the Biden administration’s tax policy initiatives and proposals, is completely silent on the topic of tax-exempt bonds.

The absence comes despite President Joe Biden’s reputation as a pro-infrastructure leader who has launched the country’s “infrastructure decade.”

“The world is full of anomalies and one of them is that the infrastructure president hasn’t strengthened the muni bond market” with either the Bipartisan Infrastructure Law or proposed tax policies, said Edwin Oswald, a tax partner at Orrick, Herrington & Sutcliffe LLP specializing in tax-exempt bonds and former Treasury official. 

“Municipal bonds – the financial engine of infrastructure – have largely been ignored, and it’s odd.”

Part of the problem could be that Treasury does not currently have a muni finance expert in the Office of Tax Policy, long considered a well-placed market advocate, and one that public finance advocates have been pushing for since the last attorney, John Cross III, retired in 2019.

Muni advocates in Washington have spent years lobbying for tools like tax-exempt advance refunding, which stripped away in the 2017 Tax Cuts and Jobs Act, as well as lifting the ceiling on bank-qualified debt and a direct-pay bond program like the popular Build America Bonds under the Obama administration.

After coming close in 2021 with the bill that became the Infrastructure Investment and Jobs Act, the priorities were eventually dropped during negotiations.

Hope springs eternal, but Biden’s lack of muni-related proposals sends a signal to Congress, market participants said.

Biden unveiled his $6.7 billion fiscal 2024 budget on March 9, followed closely by the Treasury Department’s release of the General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals, also known as the Green Book, which provides details on the revenue and tax policy proposals.

“We track the Green Book when it comes out, we look for any kind of guidance and we were surprised as well,” said Emily Brock, federal liaison for the Government Finance Officers Association. “Why doesn’t it at least rise to the point where there’s some guidance?”

Given the narrow Republican control of the House, the passage of any significant tax legislation is unlikely anyway. But the Green Book remains important in part because it points to proposals that could pop up in the 2024 presidential race if Biden runs again. Also, the budgetary proposals “once released, never truly disappear,” said KPMG in an analysis of the latest Green Book. “These ideas have a long shelf life in the tax policy world and are likely to reappear in various formats in the years (perhaps decades) to come.”

“It either signals a change in the administration’s thinking – that they’ve done enough on the infrastructure front, or perhaps it could be a lack of communication between the White House and Treasury,” Oswald said. As a former Treasury staffer, Oswald said the department generally talks with White House finance staff about which tax policies to include in the Green Book.

The lack of a muni expert at Treasury may also be part of the problem, he said.

Treasury declined to comment on the position. A source familiar with the department suggested Treasury may be poised to soon name a replacement.

The issuer community has had a “strong positive relationship with staff of the US Treasury,” since 1986, the GFOA said in an March 2020 letter to Treasury urging them to fill the spot. “Our closest relationship is with the Office Tax Policy where since the early 1980s there has been specific expertise in the federal tax issues relating to state and local bonds,” the GFOA said. “Without such expertise, we are concerned that issues affecting tax-exempt bonds will no longer be addressed in a timely manner and without causing disruptions in the market.”

In 2021, the Public Finance Network sent a letter to newly appointed Treasury Secretary Janet Yellen that requested the position be filled.

“This expertise in the tax rules for qualified municipal securities and the manner in which the municipal bond markets operate had long been effective in drafting and implementing tax policy in the tax-exempt domain,” the letter said. “Filling this role would allow Treasury to better meet the diverse needs of municipal issuers.”

Brock said John Cross was “very much an active participant in Treasury’s activities and a useful advocate on the inside for muni issuers.” His exit, she said, “left a legacy effect.”

The administration’s silence means the market needs to step up to make itself heard in Congress, Brock said.

“There are ongoing tax tools in the toolkit that if we don’t see them in the Green Book, these tools are taken for granted, and I think that would motivate to ensure the industry is asking for an updated version of all these tools in order for them to be used efficiently.”

Like Brock, Johnny Hutchinson, a partner at Nixon Peabody, noted that the recent introduction of a bill to restore tax-exempt advance refunding shows the Green Book doesn’t dictate all Congressional actions.

“It would have been nice if that had showed up in the Green Book as well, but the Green Book is only relevant as it becomes a conduit to Congress,” Hutchinson said.

There may be a silver lining to being ignored, Hutchinson added: it lowers the threat level to existing market tools like the tax exemption itself.

“It was only a few years ago that all of private activity bonds were on the chopping block,” he said. “It might be okay to fly under the radar a bit.”

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