Let’s get creative and make a deal with D.C.

The new Republican House and Senate have assumed power and Inauguration Day for the second Trump Administration is soon to follow. This year will be an exciting one of change for our country, and surely the municipal bond industry will keep an eye on Washington as Congress works to extend key provisions of the 2017 Tax Cuts and Jobs Act.

The public finance industry — state and local governments, bond lawyers, muni bankers, financial advisors, and all professionals involved in our projects — needs to be prepared and activated. We should quickly respond to the changed political environment in D.C. The legislative reconciliation process will move fast and cutting the budget is in vogue. As such, we must recalibrate our goals as an industry to reflect the new political paradigm.

Tax-exempt bonds can be used effectively to help accomplish many goals of the Republican majorities as well as help solve critical problems we face today in urban and rural America alike. As an industry, we should update our legislative and regulatory goals while creatively limiting the Office of Management and Budget “scoring” of costs of some proposals. Such an update is sorely needed. The industry should propose simple, yet well-designed and bipartisan tax reforms that facilitate tax-exempt bond issuance while furthering Trump policy goals and fostering federalism.

Tax-exempt bonds can be used to help reduce the size of the federal government, construct efficient sources of power, develop affordable housing, foster growth in AI, chip manufacturing, crypto currency mining, and data centers, and allow projects to remain viable in the face of expected decreases in federal grants, all the while creating better infrastructure. Here are some specific examples:

1. Federal government assets like NPR and other media outlets could be sold to not-for-profits, financing the purchase with tax-exempt bonds. Perhaps allow for federal subsidies in the early years without rendering the bonds taxable. The same concept could be used for other federal assets, such as transportation assets or real estate, that would have market value in the private sector.
2. Create a new category of private activity bonds for transmission lines for the transportation of clean power for projects that will be losing federal grants. Same for the production of nuclear power from the modern, smaller nuclear plants currently being constructed. Another possibly would be to allow for federal guarantees without tripping up the tax exemption.
3. Lowering the 50% threshold requirement of tax-exempt bonds needed to access tax credits for affordable housing projects would kick-start affordable housing nationwide without a massive increase in tax-exempt bond issuance, and at a relatively low cost to the Treasury. The House in 2024 passed legislation lowering the cost to 30%; hopefully the new Senate can join the effort and even reduce the percentage. Eliminating or reducing volume cap allocations also remain worthy of serious consideration.
4. Allow for tax-exempt bonds to finance charter schools without regard to the tax status of the school or source of debt service payments.
5. It is expected that the new administration will drastically reduce or eliminate infrastructure grants. To compensate for this change and increase viability of projects, management contract rules should be liberalized to allow for more private management of projects (including profit sharing) financed with tax-exempt bonds.
6. Bring back direct-pay interest subsidy bonds, such as Build America Bonds, which could help jumpstart infrastructure projects.
7. Borrowing from a successful idea from 2001 when Congress helped New York City after the September 11 terrorist attacks, to help cities recover from their post-Covid economic problems stemming from the new remote work realities, allow for additional tax-exempt refundings of general obligation debt. Include a requirement that debt service savings must be directed to job creation, rent reduction for empty storefronts, or mortgage refinancing assistance for mostly vacant office buildings in danger of foreclosure.
8. Add a new category of PABs for power plants solely dedicated to producing power for AI and chip manufacturing facilities, crypto currency mining, data centers, and related infrastructure.

We need to be prepared to negotiate limits on some existing bonding authority in exchange for these new powers. Perhaps we can further policy goals simultaneously. For example, we can propose limits on tax exemption for higher education bonds without new certifications of compliance with civil rights laws prohibiting anti-semitism.
In the 1950s, 1960s and 1970s, before political hostility later emerged, tax-exempt bonds were widely seen as successful financing solutions for various types of public-oriented projects (housing, airports, transportation, and resource recovery to name a few) that furthered the public good. More recently, in the face of tragedies like September 11, deadly, destructive storms, and economic strife, there has been a widespread recognition that bonds were needed to provide lower cost capital to help rebound. Some of the policy goals may have changed over time, but the guiding principle remains true. Tax-exempt finance should be used to advance broader legislative policy goals. We need to get on offense and explain this truth to the new governing powers.

Despite record bond issuance in 2024, as an industry we must assess the new political paradigm in Washington and recalibrate our legislative and regulatory goals. By limiting the duration of any new categories of tax-exempt bonds we can DOGE–proof the criticisms. Perhaps some of our perennial hobbyhorse requests may need to be dropped. But we should only do so in exchange for new expansions of tax-exempt bond authorizations that would help achieve the new administration’s broader policy goals. Such a deal-making approach would improve infrastructure at a lower cost to the federal government than grants or broad tax credits, improve inner cities, and help make America prosper again.

Jonathan A. Ballan is a Partner and Head of Infrastructure and P3 Finance at Harris Beach Murtha. He served as Chairman of the New York Municipal Assistance Corporation, Chairman of the New York Public Asset Fund, and on the MTA Board and SONYMA Board. The opinions expressed are his own.