Taxable boom may undermine the case for the muni tax-exemption

There is a small but growing concern among some municipal market participants that the increasing popularity of taxable muni bonds could begin to undermine the community’s traditional argument to protect the tax exemption.

The proliferation of taxable muni deals this year is the result of a combination of factors, most prominently the loss of tax-exempt advance refundings in the 2017 Tax Cuts and Jobs Act and a low interest rate environment that has narrowed the spread between tax-exempt and taxable bonds. Analysts, lawyers, and lobbyists remain dedicated to the preservation of the tax exemption, but some said that an extended continuation of these conditions could make that struggle harder.

“Our number one concern in the advocacy arena is maintaining the tax exemption,” said Brett Bolton, vice president at Bond Dealers of America.