Not just tax-exempt bonds: GOP policy cuts target infrastructure funds, hospitals, colleges

A House Republican menu of proposed cuts and revenue-raisers floated last week, which includes the elimination of tax-exempt bonds, would also impose limits on some advance infrastructure funds and potentially squeeze billions from hospitals and colleges.

The Bond Dealers of America and other municipal market groups circulated proposed budget offset measures Friday. It's the first concrete indication that Congress is eying the tax exemption as part of their hunt for revenue to help cover an extension of the 2017 Tax Cuts and Jobs Act.

The estimated cost of extending the TCJA totals around $4 trillion, although Republicans have yet to name a final figure, which will be determined in part by the scoring process they use.

The policy menu circulated last week features trillions in savings, but passage of many of the proposals will be complicated by the GOP's thin House majority. One of the proposals with the largest savings, an estimated $1 trillion, would come from eliminating the individual and business state and local tax deduction.

President Donald Trump, in a series of executive orders signed Monday, his first day as president, echoed some of the proposals outlined in the House document. Among other things, he ordered a pause in the outlay of funds in the Inflation Reduction Act, former President Joe Biden's climate law, and the Infrastructure Investment and Jobs Act. The order singles out the IIJA's electric vehicle charging station grant program, which has sparked Republican criticism over the years. The order requires a review of the laws' "processes, policies, and programs for issuing grants, loans, contracts, or any other financial disbursements," with a report required after three months.

In the House GOP document, nearly 20 reforms are targeted at the healthcare industry and hospitals. Fully eliminating the nonprofit status of hospitals and healthcare firms would generate $260 billion over 10 years, according to the document.

Proposals to eliminate Medicare coverage of hospital bad debt, revamp how Medicare covers uncompensated care to hospitals and shift some services to physicians offices would save around $417 billion.

Many in the municipal market have already predicted colleges and universities could be caught in the crosshairs this year. The policy menu proposes increasing an existing endowment tax of 1.4% to 14% and expanding it to apply to 10 or 12 more colleges if they don't admit more American students.

Also as expected, tax credits created or expanded in the Inflation Reduction Act are targets. Repealing credits related to everything from home efficiency to carbon sequestration and sustainable aviation fuels would save to $796 billion over 10 years, the GOP said.

The full cost of the IRA provisions totals about $329 billion, but that rises to almost $800 billion "when paired with the tailpipe emission rule designed to dramatically increase the uptake of EVs and EV credit use," the report said. "Based on political will, there are several smaller reform options available" that would repeal a smaller portion of these credits.

The menu also suggests tightening eligibility for some grant programs in the 2021 Infrastructure Investment and Jobs Act, former President Joe Biden's signature legislation that structures much of the funds as untouchable advance appropriations.

The GOP document notes that the advance appropriations are "unable to offset new spending in a reconciliation bill," but proposes "restrictions" or "limitations" on "certain IIJA advanced appropriations of duplicative programs that are eligible for several competitive grant programs," naming Amtrak, EV charging stations and bike paths as examples of programs that "can crowd out" more traditional infrastructure projects. The proposal does not include a savings estimate.

As to the tax-exempt bond provision, two market participants weighing in this week said its inclusion on the list was not surprising given months of chatter and the hunt for revenue.

Municipal Market Analytics in its weekly report noted that a recent Public Finance Network report estimates issuers would pay an additional $823 billion in borrowing costs over the next 10 years if the exemption were removed, "a change that House Ways and Means estimates would raise only [around] $360 [billion] for the US Treasury. The actual math here does not work in Congress' favor, but this, on its own, has never been a barrier to federal policy development," MMA said. "Of course, any Republican-only bill is going to be difficult to pass with such thin majorities in the House and Senate, and Democrats may still have major political leverage if their votes are needed to stave off a U.S. default."

In its weekly report, JP Morgan said it still does not expect the full exemption to be eliminated "primarily due to the political challenge of doing so," noting that tax-exempt debt in Republican states totals $1.2 trillion and $2 trillion in Democratic-led states and that and eliminating the tax exemption would raise a small amount relative to the cost of extending the TCJA. The GOP's thin majority complicates passage of any large legislation, JP Morgan added.

"However, we do generally believe that the risk for modifications to the exemption has increased, particularly for higher ed, healthcare and private activity bonds," the bank warned.