Senate Finance bill shields tax-exempt bonds, leaves SALT debate on table

The municipal market dodged another bullet Monday as the Senate Finance Committee advanced a wide-ranging tax bill that bill that leaves untouched the municipal bond tax exemption.

The 549-page tax and healthcare bill is part of the GOP’s massive “one big beautiful bill” that encompasses President Donald Trump’s agenda on tax cuts, defense, immigration and healthcare reform.

In a surprise move, the Senate called for deeper cuts in the provider tax programs used by states to cover Medicaid payments than the House bill passed last month.

It leaves the state and local income tax deduction cap — which has emerged as one of the thorniest issues — at current levels, a move that’s considered a placeholder while negotiations continue. Like the House version, it permanently extends the 2017 individual tax cuts.

The measure closely follows the House bill on the tax-exempt bond front, with only two minor mentions of the financing tool. One would lower the 50% threshold test for bond-financed 4% Housing Credit properties to 25%, allowing additional buildings financed with tax-exempt bonds to qualify for housing credits. The so-called Low Income Housing Tax Credit fix has been a key priority for housing advocates.

Also echoing the House bill, the Senate version broadens the use of proceeds for certain qualified small issue bonds, allowing more research and development expenses and certain manufacturing activities to qualify for tax-exempt financing.

Market participants have been on pins and needles since January when a House document signaled the tax exemption would be tapped as a potential pay-for.

The Senate Finance Committee was not expected to take aim at the exemption, especially after the House Ways and Means Committee did not tap the potential revenue raiser after weeks of intense lobbying from the public finance industry.

Still, it’s a relief, said market participants.

“We applaud the Senate for following the House’s lead in preserving the tax-exempt status of municipal and private activity bonds,” said Brett Bolton, the Bond Dealer of America’s vice president of federal legislative and regulatory policy.

“While the process is not over and there’s still lots of negotiation to be had in the Senate, we feel good about where things stand today,” Bolton said. The BDA plans to “continue advocacy up on the Hill in both the House and the Senate to ensure nothing changes as they go through the next steps.”

In 2017, as Congress crafted the Tax Cuts and Jobs Act, a provision that directly targeted the municipal bond market — the elimination of tax-exempt advance refunding — did not emerge until after both chambers passed their versions and were hammering out their differences in conference.

In a Monday note to its members, the BDA said it met last week with Senate Finance Chair Sen. Mike Crapo, R-Idaho, and that “he expressed some doubt about Leader Thune’s July 4th timeline,” referring to the Republican leader’s ambitious timeline to get the legislation on Trump’s desk.

In addition to the lack of a deal on SALT, “the committee’s hands are tied as it waits for key provisions to be scored by the Congressional Budget Office, a requirement for the next steps of the reconciliation process and an issue that will likely slow progress in the near term,” the BDA said.

The bill restores a $10,000 state and local tax deduction cap, down from the House’s closely negotiated $40,000 cap that won the vote of key blue state Republicans. The Senate’s move is widely considered a placeholder as the two sides continue to negotiate a final number.

Cities and states view the SALT issue as important as they see the cap as restricting their ability to levy taxes while some investors see the cap as increasing, at least minimally, the demand for tax-exempt bonds.

The SALT issue almost sank the House version as leaders struggled to win over the Republicans they need to cover their thin margin. After the Senate committee released its text, several SALT Caucus Republicans said they would oppose it as written. “Instead of undermining the deal already in place and putting the entire bill at risk, the Senate should work with us to keep our promise of historic tax relief and deliver on our Republican agenda,” co-chairs Reps. Young Kim, R-Calif., and Andrew Garbarino, R-N.Y., said in a statement.

On the Medicaid front, the Senate bill could hurt nonprofit healthcare issuers, especially rural hospitals. It calls for lowering the allowable provider tax — which states use to finance their Medicaid programs — starting in 2027 from the current 6% of net patient revenue to 3.5% in 2031. States traditionally return the taxes to the providers in the form of higher Medicaid payments, which in turn snag higher federal matches. Nursing and intermediate care facilities would be exempt.

The House bill, in contrast, put a moratorium on states’ ability to raise their provider tax beyond the current 6%. The Senate version would also reduce existing state supplemental Medicaid payments to hospitals.

Certain higher-education institutions would see their endowments taxed at 8% under the Senate bill, up from the current 1.4% but significantly under the House’s proposed top rate of 21%. And the Senate would make permanent opportunity zones, created in the first Trump administration, beyond 2026 with new designations every 10 years.

Majority Leader John Thune, R-S.D., said the plan is to bring the bill to the floor next week for limited debate and amendments.

Finance Chair Sen. Mike Crapo, R-Idaho, said he would work with the House and the Trump administration to pass the bill “as quickly as possible.”

“This bill prevents an over-$4 trillion tax hike and makes the successful 2017 Trump tax cuts permanent, enabling families and businesses to save and plan for the future,” Crapo said in a statement. “The legislation also achieves significant savings by slashing Green New Deal spending and targeting waste, fraud and abuse in spending programs while preserving and protecting them for the most vulnerable.”