Byrd rule could threaten muni tax exemption

The budget reconciliation process is hitting speed bumps of opposition and the effects of the Byrd Rule, sometimes referred to as the "Byrd bath," a process that has the Senate Parliamentarian disqualifying provisions that were designed to pay for tax cuts.

"Some of the provisions that she is striking can impact the total amount of pay-fors in the legislation," said Leslie Powell, a partner at KutakRock.

"You have a Congress that has slim majorities, and you have a portion that is hyper focused on reducing the deficit. Because the tax code is so sweeping, the reconciliation process and what could happen next means that everything is still on the table."

The warning come in in conjunction with a client alert published by Kutak Rock on Tuesday.

"The Kutak Rock admonition is right on," said Chuck Samuels, member at Mintz and counsel to the National Association of Health & Educational Facilities Finance Authorities.

"Municipal market participants should not assume that fully saving our tax exemption is a done deal when so many major pieces of this legislation are very much up in the air."

Eliminating the tax exemption of municipal bonds is sometimes presented as an easy way to pay for tax cuts and appeared on a list of potential targets when the reconciliation process began in January.

The Byrd Rule was named after West Virginia Sen. Robert Byrd and was adopted in 1985. The rule is designed to keep extraneous provisions out of budget reconciliation bills and hinges on arcane and subjective rules governing how and if provisions affect the budget deficit.

The Senate Parliamentarian serves as the arbiter of the process, but the role is considered advisory.

The reconciliation process is already on a rough ride in the Senate as food benefits, immigration, banking regulations, agency reorganizations, and clean energy credits are all taking turns in the Byrd bath.

The possibility of Medicaid cuts is causing consternation. Sens. Josh Hawley R- Mo., Susan Collins R- Maine, Jerry Moran, R-Kan., and Bill Cassidy R- La. are looking at forming a stabilization fund to protect rural hospitals.

Clean energy credits remain a formidable bugaboo as the Committee on Environment & Public Works is calling for rescinding unobligated Inflation Reduction Act funds.

House Representatives Mark Harris R-N.C. Andy Harris R-Md., Eric Burlison R-Mo. and Chip Roy R-Texas have all signaled they don't want the Senate tinkering with their version of the legislation.

The Senate is also ignoring the House's SALT caucus regarding the proposed increase of the state and local tax deduction.

The issuer community would generally like to see the SALT cap raised or eliminated as it is seen to infringes on state and local tax policies. The larger threat to the tax exemption has been the chief concern.

"We're cautiously optimistic that the success we've had to date is a really good sign," said Powell. "But we're also really cognizant of the fact that the fight isn't over, and it won't be over until legislation is on the desk for the President to sign."

Muni watchers are also on guard for whatever happens after the current budget finally gets wrapped up.

"The Byrd Rule process may pose an immediate threat, but the risk won't vanish?even after this round," said Tom Kozlik, managing director, head of public policy and municipal strategy for Hilltop Securities.

"Given the regular turnover in Congress and its staff, relentless education and advocacy are not optional?they're essential."