Week of 8/16/2021

Biden Tax Hike Plans Advance… Historic Infrastructure Investment Hinged to
‘Tax-and-Spend’… Chicago ‘Recovery Budget’… Third Outlook Raise For New Jersey… Big City Office Rentals Impact Tax Base… Banks Buy Muni Bonds… Largest Ever Port Bond Sale… Muni Credit Upgrades Surpass…

Biden Tax Hike Plans Advance… The second-half of President Biden’s agenda, a sweeping 10-year, $3.5 trillion budget resolution to invest in “human infrastructure” to be paid by tax hikes was advanced by Senate Democrats a day after the $1 trillion bipartisan infrastructure bill was passed. “To ensure that the wealthy will play by the same rules as everyone else” Senate Democrats’ 50-49 party line vote seeks to upend Trump-era tax giveaways from the 2017 tax law. “Importantly, given the unfairness of our current tax system, the reconciliation bill will be paid for by increased taxes on the very wealthiest people and largest corporations in this country,” Senate Budget Committee Chairman Bernie Sanders (I-VT.) added, “The time is long overdue for Congress to address the long-neglected needs of ordinary Americans, and not just the 1% and wealthy campaign contributors. And that is precisely what we’re trying to do right now in Congress through an historic $3.5 trillion “reconciliation” bill.” Democrats have called for raising the top tax bracket for the wealthiest individuals to the 39.6% level it had been before the Republican tax cut, hiking the top capital gains tax rate to 39.6% from the current 20% and eliminating provisions that lower capital gains on some inherited assets that largely benefit the wealthy. Republicans who had supported the $1 trillion bipartisan infrastructure bill were critical of the partisan $3.5 trillion proposal. “They’ve set out trying to tax and spend our country into oblivion,” Senate Minority Leader Mitch McConnell, (R-K) said. Senator Cynthia Lummis (R-WY.) called it “a progressive grab bag of policies that you’ll pay for with your hard earned dollars either through more inflation now or higher taxes later.” Democrats would need to band together to pass all or part of the plan through the fast track process known as budget reconciliation, which bypasses a Senate filibuster. Senate committees are supposed to complete the bill as soon as Sept. 15, though negotiating the mammoth package and passing it in both chambers could take much longer. The House will interrupt its summer recess on Aug. 23 to vote on the budget resolution. Approval in the Democratic controlled chamber is expected. The budget framework will need to clear several hurdles and it could be closer to $2.5 trillion. Senate approval of the American Families Plan opens the way for the biggest tax hike in history.

Historic Infrastructure Investment Hinged To ‘Tax-and-Spend’… “After years and years of weak infrastructure, we’re on the cusp of an infrastructure decade that I truly believe will transform America,” President Biden said upon the Senate’s overwhelming bipartisan approval of a $1 trillion infrastructure reform bill. A bipartisan victory, President Biden’s $1 trillion infrastructure investment plan won the support of Senate Democrats and 19 Republicans including Senate Minority leader Mitch McConnell. McConnell said, “I was proud to support today’s historic bipartisan infrastructure deal and prove that both sides of the political aisle can still come together around common sense solutions.” Its fate in the House rests on the ambitious and partisan $3.5 trillion American Families Plan. House Speaker Nancy Pelosi and majority of the 100-member Progressive Caucus have said they will not vote on it unless and until the Senate passes the $3.5 trillion social spending plan funded by tax hikes on the wealthy. With a bipartisan victory in hand, Democrats turned immediately to a more ambitious and partisan American Families Plan. Senate Majority Leader Chuck Schumer said, “We’re moving on to a second track, which will make a generational transformation.”

Chicago ‘Recovery Budget’… Chicago is projecting a Fiscal 2022 budget shortfall of $733 million, down from $1.2 billion last year. “Whereas last year we were faced with a $1.2 billion ‘Pandemic Budget,’ this year we have shifted to a ‘Recovery Budget’ that not only reflects the challenges we have been presented with, but the number of resources we’ve brought to bear to address them.” Mayor Lightfoot added that a lower shortfall is a “great indication that our city is fiscally bouncing back from this crisis.” Chicago CFO echoed, “As was the case in Fiscal years 2020 and 2021, much of the 2022 gap is due to pandemic-related revenue loss. Chicago’s economy and nearly $700 billion gross regional product is our greatest tool for financial stability and so far, that economic recovery in 2021 has been better than originally projected.” The shortfall will be eliminated by refinancing high coupon debt and using the $1.9 billion federal stimulus funds. Chicago finances are on track to achieve structural balance in 2023.

Third Outlook Raise For New Jersey… Fitch became the third rating agency to raise New Jersey’s credit outlook to positive from stable in the last month. “It is incredibly gratifying to see, for the third time in a month, rating agencies acknowledging that the decisions made by our administration, the Treasurer’s team, and our partners in the Legislature have put New Jersey on the right path to a full economic recovery,” Governor Phil Murphy added “We have not and will not squander this opportunity to tackle the remaining fiscal challenges New Jersey faces.” Fitch noted “A solid economic rebound, state balancing actions during the pandemic and multiple rounds of federal assistance are now providing the state with both a solid financial cushion and extra capacity to accelerate progress on its high liabilities.” New Jersey Treasurer noted, “These steps will ensure New Jersey is on solid fiscal footing to tackle any future challenges that may come our way.”

Big City Office Rentals Impact Tax Base… Higher commercial vacancies and lower rents will likely depress assessed valuations near term. With commercial real estate valuation down almost 10% from a year ago, New York City expects to collect about 5% less property tax revenue in Fiscal 2022. Valuation changes are unlikely to impact Chicago which adopts a tax levy and tax rate that is adjusted to produce the established levy. Property tax is 18% of Chicago revenue, 30% of NYC revenue and 67% of revenue in Boston. Varying property tax frameworks make some cities more resilient than others to COVID-19 related real estate trends. Commercial real estate vacancy recovery is likely after 2023.

Banks Buy Muni Bonds… Banks have bought more muni bonds in 2021. Taxable muni bonds issued by states and cities are a sweet spot for banks. Banks’ muni bond purchases have added to the cash flooding into municipal bonds in 2021, contributing to high prices of muni bonds relative to comparable U.S. Treasuries. Banks are some of the largest and most active investors in state and local debt.

Largest Ever Port Bond Sale… Port of Miami’s $1.4 billion bond sale sets the record for the largest bond sale tied to a port, beating $1.1 billion issued by the Port Authority of New York and New Jersey in July 2020. Port Miami CEO stated “Now is the right time to take advantage of historically low interest rates.” A muni bond rally has led to record low yields. The record size of new bond offering is a sign of the strength of the overall municipal market,

Muni Upgrades Surpass… For the first time in over a year, credit upgrades surpassed COVID-19 related downgrades. “The ratio of upgrades to downgrades was 1.38 to 1, above the average over the last 10 quarters.” Changes in operating environments led to the rating activity. Improving financial conditions are reflected in narrower credit spreads or yield penalty, driving gains for high yields bonds. Bank of America analysts noted. “Indeed, we see room for more compression to come for the rest of 2021.”

Compare 30-Year taxable U.S. Treasury yield 1.92% to 30-Year tax-exempt muni bond yield “AAA” 1.54%; “AA” 1.73%; “A” 1.86%; “BBB” 2.29%. For investors in the 35% tax-bracket, a 2.2% tax-exempt yield is equivalent to a 3.4% taxable yield. Top rated tax-free bonds yield 80% of comparable taxable U.S. Treasuries.

If you have any questions or desire updated information contact your GMS Account Executive.