Tax exemption intact as massive tax, budget bill heads to Trump’s desk

After months of nail-biting over the fate of tax-exempt municipal bonds, the muni market can breathe a sigh of relief as the final version of the Republicans’ mammoth tax and spending cuts bill passed Thursday without touching the market’s prized financing tool.

“There are a ton of provisions that directly and indirectly impact issuers, but of all them [protecting the tax exemption] is one where we feel very proud of the efforts of the coalition,” made up participants across the market, said Emily Brock, federal liaison of the Government Finance Officers Association. “It shows we have been clearly successful in relaying to Congress just how vital municipal bonds are for every single congressional district in the country.”

The House of Representatives Thursday afternoon passed the “One Big Beautiful Bill” after a 29-hour vote-gathering session in which Republican leaders and President Donald Trump persuaded hard-right House members to support the bill. The White House promised future executive actions in return for their support of the bill, which forms the centerpiece of Trump’s domestic agenda.

The Senate approved the legislation Tuesday. The arduous process in both chambers, which featured intense intraparty GOP debate, avoided a final conference session that some in the muni market worried would present a fresh threat to the exemption.

It now heads Trump’s desk to sign on July 4, hitting an aggressive timeline set by House Speaker Mike Johnson, R-La., months ago. A signing ceremony is set for Friday.

The municipal market, on edge anytime Congress takes up a tax bill, had more reason to worry this time after the House targeted the tax exemption as a potential revenue-raiser to cover the cost of the package. The stakes were high: cities and states would have faced significantly higher borrowing costs for cities and states and bond attorneys, underwriters, analysts and investors would have seen their market, and in some cases their jobs, evaporate.

In response, the muni market lobby, led by the Government Finance Officers Association, the Public Finance Network and the Bond Dealers of America, launched the largest lobbying effort in recent memory to “educate” lawmakers about the importance of tax-exempt muni bonds.

“We rallied together, all the market participants,” Brock said. “Everyone realized this was a serious threat and so it was a team effort.”

With a second reconciliation bill possible later this year, Brock said she hopes the campaign will have a “lasting impact” on lawmakers. “The work is ongoing and we will continue to utilize the data and the research that has helped us so far,” she said.

While market participants worried in particular about the fate of private activity bonds, the final legislation not only left them alone but expanded their uses to spaceports. The last-minute provision, added by the Senate during its amendment session, allows for the issuance of tax-free private-activity bonds that would be exempt from the state volume cap for space infrastructure.

While the market’s financing tools were left alone, the legislation threatens negative credit impacts for many bond issuers, particularly rural hospitals. The nearly $1 trillion of Medicaid cuts are expected to mean that 11.8 million Americans will lose their health insurance by 2034. The legislation requires states that expanded Medicaid under the Affordable Care Act to begin to lower provider tax rates, which they use to help fund health care facilities, from 6% to 3.5% incrementally between 2027 and 2032 .

The bill sets up a $50 billion relief fund for rural hospitals, which the Senate added to assuage moderate Republicans concerned about their rural providers that rely on Medicaid.

The final version waters down the House’s top excise tax rate of 21% on the endowments of certain colleges and university to a tiered system with a top rate of 8%. That’s up from the current flat 1.4% rate.

In other bond provisions, the bill preserves a House-crafted proposal that would lower the 50% threshold test for bond-financed 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 final 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.

The bill would permanently extend the increased individual alternative minimum tax exemption amounts and would make opportunity zones, created under the 2017 Tax Cut and Jobs Act, permanent.

The cap on federal income tax deductions for state and local taxes — which was among the bill’s thorniest provisions — would cap itemized deductions for state and local taxes at $40,000 per household with a $500,000 income cap for married couples. In the final bill, the cap will revert to $10,000 in 2030.

The bill phases out the investment tax credit and production tax credits for wind and solar projects but allows the credits to continue for projects that are under development within 12 months of the bill’s enactment.

The Senate for the first time relied on a budgeting model called current policy baseline, which essentially zeroes out the cost of extending the tax cuts. The impact of that budget method on the Pay‑As‑You‑Go Act of 2010, which requires across-the-board spending cuts, or sequestration, a measure that affects direct-pay bonds, remains to be seen. The Congressional Budget Office, in a May 20 letter, noted that the deficit-raising impact of the bill would trigger sequestration “without enactment of subsequent legislation that would offset the deficit increase, waive the recordation of the bill’s effects on the scorecard, or otherwise mitigate or eliminate the statutory requirements.”