Repercussions of TAX POLICY CHANGES FOR MUNICIPAL BONDS BY DANA SPARKMAN, THE BAKER GROUP 2025 will undoubtedly be a year of intense tax-related negotiations among lawmakers with the looming expiration of the Tax Cuts and Jobs Act of 2017 and Republicans in narrow control. While it is too early to know concrete tax plans from President Donald Trump’s second term, we have some insight into what he would like to implement as stated on the campaign trail, including: ▶ Extending most provisions of the Tax Cuts and Jobs Act of 2017, except the State and Local Tax deduction cap may be raised or eliminated. ▶ Lowering the corporate tax rate to 20% generally and to 15% for domestic manufacturers. ▶ Exempt from taxes income derived from tips, overtime pay and social security. How these items will be paid for is largely a guessing game at this point, but municipal market participants worry that possible “pay-for” options may harm the municipal market. Demand The common theme of Trump’s wish list is a low tax burden on American taxpayers and companies. All else equal, demand for tax-exempt income diminishes as tax rates fall. Individual tax rates are currently expected to remain at present levels (top rate of 37%), and general corporate tax rates may fall slightly from 21% to 20%. Data from the Securities Industry and Financial Markets Association shows that over 70% of municipal bonds are held by individuals and mutual funds rather than by corporate taxpayers, as shown in the chart below. This was the case even before the Tax Cuts and Jobs Act slashed corporate tax rates. DIRECTORS & SENIOR MANAGEMENT 48 HOOSIERBANKER
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