Politicians, particularly when they’re on the winning end of the deal, often say elections have consequences. It’s true. And it’s wisdom that advisors and muni bond investors need to remember.
Congressional power recently changed hands in significant fashion. Democrats now control a steep majority of governorships across the country. That indicates there could be important policy implications for muni bonds. At the federal level, there’s now a divided government. That could affect spending legislation. And that could potentially result in more money flowing into states and cities or vetoes of such proposals.
“Democratic control of either chamber would create divided government and could limit major legislative changes or complicate negotiations over appropriations, federal programs and taxes,” noted Franklin Templeton. “Even so, bipartisan legislation would remain possible. For municipal investors, the key question is how the resulting alignment affects fiscal policy and the municipal market.”
One of the primary perks of this asset class are some tax exemptions. That makes munis appealing to affluent investors in high-tax states. Muni bond tax exemptions were extended via reconciliation last year. New congressional majorities could put the issue back in the spotlight.
“While we view changes to the muni tax exemption as unlikely, the exemption frequently gets attention during budget cycles,” added Franklin Templeton. “Other policies that could be revisited include changes to individual income tax rates and the state and local tax deduction. We believe that the importance of the municipal bond market as the source of most infrastructure financing in the country will continue to generate bipartisan support.”
Muni bond investors should also consider the potential effects of new governors across the U.S. and incumbents who either won big or have been emboldened by their parties capturing greater shares of state legislatures. Said another way, states could be ready to spend, potentially meaning a spate of new muni supply will come to market, or some jurisdictions could look to rein in spending.
“New administrations may accelerate or defer transportation, water, housing and other capital investments,” according to Franklin Templeton. “These decisions can influence future municipal bond issuance, debt burdens and the financing needs of public-sector borrowers.”
Investors looking for state-level clues about how the elections could affect muni bonds may want to keep their eyes on “trifecta” states. These are jurisdictions where one party controls governors’ mansions as well as both chambers of legislatures.
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