Week of 9/13/2021

House Democrats Outline Tax Hikes For Wealthy… Value in Municipal Bond Yields… Hospital Profits Dip… Upside in Puerto Rico… Sports Bets Are On…

House Democrats Outline Tax Hikes on Wealthy… On Capitol Hill, a plan to impose an additional surtax on individuals who make more than $5 million, along with a top corporate tax rate of 26.5%, was released yesterday by the House Ways and Means Committee. The outline increases the top tax rate for capital gains to 25% from 20%. President Biden had proposed essentially doubling that tax rate. House Democrats are considering increasing the top marginal income tax rate to 39.6% from 37% for households that report taxable income over $450,000 and for unmarried individuals who report more than $400,000. For people who make more than $5 million, the proposal would impose a 3% surtax, which is expected to raise $127 billion. The proposal would provide $80 billion over the next 10 years for the Internal Revenue Service to beef up tax enforcement, that could raise $200 billion. It calls for a tiered corporate tax system with a top rate of 26.5% for large profitable businesses, up from the current rate of 21% but lower than President Biden’s original proposal of 28%. Taxes on tobacco products such as e-cigarettes are expected to raise $96 billion. The revenue provisions fall short of fully financing Democrats’ $3.5 trillion federal spending on paid family leave, climate change and expanded public education. The White House said that the outline “makes significant progress toward ensuring our economy rewards work and not just wealth by cutting taxes for middle class families, reforming the tax code to prevent the offshoring of American jobs and making sure the wealthiest Americans and big corporations pay their fair share.” The House Ways and Means Committee will continue to work on the outline this week before the text of the legislation is finalized. House Speaker Nancy Pelosi (D-CA) aims to have the proposal fully written by September 15. The plan is in flux as it still needs to muster support from business minded Democrats, many of who hail from swing districts. Senator Joe Manchin (D-WV) a moderate Democrat, whose vote is crucial, has floated a $1.5 trillion ballpark for the package. Democrat negotiators could pare down the package to push it through Congress, where Democrats have a narrow majority in both houses. To avoid a Republican filibuster and pass it with a simple majority, Democrats can spare only three votes in the House and must remain united in the Senate. Taken together, the plan amounts to a substantial wind down of Trump-era tax cuts and could raise as much as $2.9 trillion to pay for President Biden’s sweeping social safety net by hiking taxes on the wealthiest corporations and individuals.

Value in Municipal Bond Yields… Prices of long term municipal bonds are attractive, with top rated long term municipal yields fetching 83% of comparable Treasury bonds. The Muni Treasury ratio, a gauge of tax-free bond prices, was as low as 67% in June. A lower ratio suggests ‘rich’ or lofty valuations for municipal bonds. Concerns about the Delta variant and slower trading in summer months contributed to relatively lower prices
of municipal bonds. Uncertainty about the Delta variant has brought ratings downgrades for some government agencies that sold bonds backed by revenue of hotels, convention centers and amusement parks. “Tourism related credits were the first thing on our mind when the pandemic occurred,” a S&P analyst noted. “Nationally it’s still not fully recovered at this point.” New York’s Javits Center recently saw its Moody’s rating downgraded, while S&P cut the rating on hotel room revenue secured bonds issued for California’s Disneyland. Pockets of ratings downgrades stand in contrast to most of the $4 trillion municipal bond market where states and local governments have earned favorable ratings outlooks and upgrades. Investors who purchased municipal bonds at the peak of COVID-19 related uncertainty found gains as federal money and mass vaccinations made its way. High yield bond index returns exceed 7% this year and remained flat in August. After municipal bond supply dwindled in August, the pace of municipal bond issuance is expected to pick up in September. Tax-free bond issues spanning a broad range from the State of California to Atlanta’s international airport, charter schools and retirement communities, are upcoming in the new issue calendar. Investors may want to add exposure to tax-exempt bonds in the next several weeks, Barclays analysts pointed out last week. With record cash flowing to municipal bonds this year and many funds recently turning away new investors, the favorable pricing could be opportune. Lower than lofty valuations a month back, current municipal bond prices could offer a window for municipal bond purchases.

Hospital Profits Dip… Three years of pre-COVID financial stability were upended when Hospitals dealt with the pandemic. Hospital expenses grew faster than revenues during the pandemic. High labor and supply costs weighed on hospital profits, amid a decline in patient volumes and elective procedures. Early emergence of COVID-19 hot spots in New York and New Jersey led to the largest profitability declines as hospitals in the northeast were hit by steep cost hikes. Strong population trends allowed hospitals in southern states to maintain highest revenue growth. In western regions, hospital plants are newer, with a lower plant age of 10.5 years relative to U.S. median almost 12 years. Driven by high cash positions and investment returns, hospitals in the Midwest displayed the strongest debt service coverage relative to other regions with maximum annual debt service coverage of 4.7x and debt to cash flow of 2.8x median based on 2020 operations per Moody’s. COVID-19’s impact on the Hospital sector varied nationwide and smaller hospitals’ profits came out slightly ahead of the largest.

Upside in Puerto Rico… The Puerto Rico Planning Board is optimistic that economic growth over the next decade could be double of what the Oversight Board has touted. The Island’s Planning Board, a local government agency responsible for economic and demographic data, believes that the Puerto Rican economy will grow at an average rate of 1.04% over the next decade. In contrast, the board approved fiscal plan assumes economic growth will average 0.54% from Fiscal 2022 to 2031. Economic growth estimates are the baseline for projecting future government revenues available for general obligation bond repayment. Overly pessimistic Oversight Board projections have been noted by bond insurers and others privy to confidential debt talks during the Island’s four- year bankruptcy process. Year-after-year, the Island’s government revenue collections have outperformed. As bondholders’ recovery is expected to include cash, fixed income and contingent value securities, economic upside is meaningful to bondholders.

Sports Bets Are On… A record 45.2 million Americans are expected to wager on the 2021 NFL season, a 36% rise from last year. Sports betting, whether in-person or mobile, are legal in close to half of 50 U.S. states. In 2018, New Jersey won a landmark ruling from the Supreme Court that favored legal betting on college and professional sports. Since then, northeastern states are fast overtaking Nevada, which is the oldest legal sports betting market. Connecticut’s hopes to legalize sports betting have been delayed, as the U.S. Interior Department did not approve a gaming pact between two Native American tribes and the state. As taxes on sports bets are fodder for state coffers, states have won the bet.

Compare 30-Year taxable U.S. Treasury yield 1.91% to 30-Year tax-exempt muni bond yield “AAA” 1.58%; “AA” 1.84%; “A” 1.94%; “BBB” 2.24%. For investors in the 35% tax-bracket, a 2.2% tax-exempt yield is equivalent to a 3.3% taxable yield. Top rated tax-free bonds yield 83% of comparable taxable U.S. Treasuries.

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