(Bloomberg) — Stephen Moore, an informal economic adviser to President Donald Trump, floated eliminating the federal tax subsidy for municipal bonds, a concerning sign for the market where states and cities raise debt.
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Local governments, as well as bankers and investors, have been worried that the key feature of the public finance market could be at risk as Republicans search for ways to raise money to extend 2017 tax cuts. Muni bonds pay interest that’s exempt from federal taxes, costing the government roughly $40 billion each year. The subsidy is one of the top federal tax expenditures, according to the Bipartisan Policy Center.
“It’s in play,” Moore said in an interview. “This is a big tax bill, and there need to be offsets.”
He said eliminating the subsidy aligns with Republican efforts to “broaden” the tax base and is more “politically plausible” than in prior years because it would directly impact wealthy investors.
“You want to tax the rich? This is a good way to do it,” said Moore. Currently, he is a senior visiting fellow at the Heritage Foundation, an influential conservative think tank. He also posted on X about the issue.
The municipal-bond tax exemption underpins the $4 trillion state and local government debt market. It allows cities, public school districts and other entities like colleges and hospitals to borrow at lower rates, reducing the burden on taxpayers who are often on the hook to pay back the debt. The mechanism also funds much of US infrastructure ranging from massive state highways to local police stations.
Since Trump’s election, government groups have been touting the benefits of tax-exempt bonds, to get ahead of any proposals to eliminate the subsidy. Public finance bankers visited DC in a trip last month to meet with Hill staff to educate them about the asset class.
“It’s disappointing to hear that munis are still ‘in play’ even after the outreach made already by thousands of public issuers,” said Emily Brock, director of the federal liaison center for the Government Finance Officers Association.
Moore predicted any change would include a “cap” on the exclusion on newly issued bonds rather than a broad repeal for debt that is currently outstanding.
“There’s going to be a lot of pushback” from local officeholders, Moore said. “Just being politically realistic, it might be more difficult to eliminate entirely.”
