Week of 9/20/2021

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Tax-and-Spend Plan Advances… Municipal Market Cheers New Bond Provisions… Demand For State Bonds… Newsom’s Landslide Victory… Chicago Schools’ New CEO… Casinos Rebound… Reopening Fuels Outperformance… States Lurch For Cryptocurrency…

Tax-and-Spend Plan Advances… The biggest tax hikes for a generation of wealthy Americans, a major part of Democrats’ $3.5 trillion tax-and-spend plan, won House Ways and Means Committee approval last week. Near party line vote of 24-19 advanced the plan, bringing $2.1 billion of new levies over ten years on the ultra-rich and most profitable businesses. The draft legislation includes a 5% surtax on incomes higher than $5 million, a 25% capital gains levy, smaller than 39.6% sought by the White House, among other tax changes. The legislation has several health related provisions, including a permanent expansion of ObamaCare subsidies. “We celebrate success in this nation. But we can also ask the biggest companies and the ultra-wealthy to contribute a bit more to the common good,” Ways and Means Chairman Richard Neal said the tax hikes would make our nation “more prosperous, more equitable, more fair.” The biggest hit would be to households making more than $1 million. The plan now heads to the House Budget Committee. 13 House committees tasked with writing the $3.5 trillion package completed their work and advanced their respective portions last week, adhering to a September 15 goal set by Democratic leaders. Speaker Nancy Pelosi will work on the math of votes, as she cannot afford to lose more than three Democratic votes to advance the plan. Timing is crucial. Along with the two-part infrastructure and social spending packages, Congress needs to pass legislation to raise the debt limit to keep the federal government funded past September 30, which Republicans oppose in protest of Democrats’ massive social spending plan. Pelosi has promised moderates she will bring the Senate-passed $1.2 trillion infrastructure package to the floor by September 27. But top progressives have threatened to oppose that smaller package until the larger $3.5 trillion bill is headed to President Biden’s desk. Any final bill that becomes law will need to get the support of both House and Senate Democrats and various Senate Democrats have different ideas on taxes and spending.

Municipal Market Cheers New Bond Provisions… Key municipal bond market provisions have won House Ways and Means Committee approval and are likely to be part of the $3.5 trillion budget reconciliation package being debated in Washington. “By reinstating tax- exempt advance refunding’s, raising the bank qualified debt limit, expanding the usage of Private Activity Bonds and creating a new direct pay bond exempt from sequestration, this package would further enhance and expand issuers’ toolbox and enable the construction, maintenance and retrofitting of infrastructure at low cost to taxpayers, which is much overdue,” Bond Dealers of America spokesperson noted. Changes to upend Trump-era cap on State and Local Tax (SALT) deductions are still under discussion. The American Securities Association (ASA) praised the committee’s passage of the muni provisions; “Municipal bonds are key to modernizing America’s infrastructure and ASA applauds Chairman Neal and members of the committee for including our infrastructure financing recommendations into the Build Back Better Act.” Committee approval marks a key step toward House Speaker Nancy Pelosi’s September 27 deadline for a House vote. Municipal credit, demand and supply will strengthen significantly if the changes are enacted, Bank of America strategists said, “A golden decade is to be expected.”

Newsom’s Landslide Victory… California Governor Gavin Newsom’s landslide victory solidifies California’s budget and fiscal path. The first-term Democrat governor captured 64% of the vote, up from 62% when elected in 2018. Republican opponent Larry Elder ranked a distant second in voter approval among 46 rivals. The recall outcome is a bellwether for the 2022 midterm elections. “The wind is at his back,” former California Governor Gray Davis noted “This will help him on policy matters, this will help him work more effectively with the legislature.”

Chicago Schools’ New CEO… “A historic process that yielded a historic candidate”, Mayor Lightfoot referred to the appointment of Pedro Martinez as the new CEO of Chicago Public Schools (CPS). Martinez, a business and accounting veteran, is no stranger to CPS having served as CFO of the nation’s third largest school district under former CEO Arne Duncan. The new CEO will navigate the teachers union’s political dynamics, as well as governance changes as CPS transitions to a new phase of being run by a fully elected school board.

Casinos Rebound… Record revenues for commercial casinos in 25 U.S. states that legalized gambling could be in store. Casino revenues through July this year, $30 billion, outnumber amounts received for similar periods in 2020 and 2019, record years. Las Vegas casinos have seen visitors increase steadily this year, though still down 10% from pre-COVID levels. Atlantic City casinos have continued to show a positive growth trend. Rebounding casinos have brightened Detroit’s finances as it hopes to collect 80% more in gambling taxes than last year’s take. With 75% of Americans vaccinated, casino tax collectors could find a turnaround in 2021. Commercial gaming and sports-betting operations paid $6.7 billion in 2020 taxes nationwide, down from $10.2 billion in 2019. A win-win for casinos and governments, Americans’ bid for more recreation enriches the tax base of cities that recreational venues call home. The casino rebound is a proxy for post-COVID-19 activity build-up at tourism, stadium and convention centers.

Reopening Fuels Outperformance… Aggregate state tax revenue for the second quarter grew 56% from a year ago and 34% more than last quarter per U.S. census bureau. California revenue increased the most in the second quarter, up 135% from a year ago. Government revenue uptrend has continued into the Fall. In August, New Jersey tax revenue was 25% more than last year, while New York sales tax collections were 15.5% higher than a year ago. Post-COVID-19 reopening has brought a rebound for state revenues.

States Lurch For Cryptocurrency… Cryptocurrency has not evaded states and local governments. Many states such as NY, TX, OH, WY, FL, have begun to set up legal frameworks for business use of cryptocurrency. Mirroring states’ initial approach to taxing internet sales, legislative and operational acceptance of cryptocurrency, a novel digital store of value, varies nationwide. In Ohio, residents may pay taxes in Bitcoin. Vying to be ‘crypto-friendly’, Florida’s Miami- Dade County and Miami are studying crypto payments for taxes and fees. In contrast, New York’s local governments are opposed to Bitcoin mining to save the environment. At the federal level, Project Hamilton, an initiative between the Federal Reserve and MIT, is coding new technologies to support a hypothetical central bank digital currency. While still in its infancy, cryptocurrency usage could have economic implications and bring cyber risks.

Compare 30-Year taxable U.S. Treasury yield 1.84% to 30-Year tax-exempt muni bond yield “AAA” 1.57%; “AA” 1.78%; “A” 1.97%; “BBB” 2.27%. 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 85% of comparable taxable U.S. Treasuries.