Tax exemption targeted by think tank as GOP mulls another reconciliation tax bill

The specter of a fresh fight over the municipal bond tax exemption has materialized after a conservative think tank has targeted the infrastructure financing tool as Republicans consider tackling a second reconciliation bill.

The Economic Policy Innovation Center Aug. 18 memo, titled The Reconciliation 2.0 Opportunity, comes just weeks after the muni market saved the tax exemption from the possibility of being axed in the massive reconciliation tax bill that President Donald Trump signed into law in July.

The think tank, which was established in 2023, is led by economist Paul Winfree, formerly of The Heritage Foundation. Winfree also held several policy roles at the White House under the first Trump administration, including director of budget policy.

"Any situation where the tax exemption is not being prioritized as an important infrastructure tool is troubling no matter who is putting it out there," said Tom Kozlik, head of public policy and municipal strategy at Hilltop Securities, who highlighted the paper in the firm's Aug. 25 weekly commentary.

"This might be a relatively new organization, but I think it needs to be taken seriously."

The six-page memo, which was sent to members of Congress, recommends repealing the "municipal bond tax exclusion" as one of five proposals included in a category titled "Support DOGE and Codify President Trump's Executive Actions."

During the first reconciliation bill process, a coalition of muni market participants, including the Government Finance Officers Association and the Bond Dealers of America, united to save the exemption with a months-long lobbying effort. That effort continues, said Brett Bolton, the BDA's vice president of federal legislative and regulatory policy.

"It is disappointing to see some continue to highlight the tax exemption as a pay-for if Congress decides to pursue additional reconciliation packages," Bolton said. "We believe munis have strong support in Washington but will continue to educate those on and off the Hill on their importance to ensure they are not targeted in any future legislation."

No one from the Economic Policy Innovation Center was available by press time.

A second bill would likely include provisions that failed to make it in the first package, which could include the tax exemption and private activity bonds, which were targeted in an early House budget document naming potential offsets.

"On the one hand it appeared that the OBBBA made it so the tax exemption was safe, but in some ways it actually raised the threat to the tax exemption because it added $4 or $5 trillion to the deficit," Kozlik said. "Depending on what lawmakers' priorities are, they will be looking for offsets."

Republican leaders and the White House are mulling the possibility of a second tax package passed through the reconciliation process, an expedited legislative process that requires only a simple majority in the Senate. Republicans can pass reconciliation bills in fiscal year 2026 and 2027.

In July, the Republican Study Committee Chairman announced the creation of the RSC Reconciliation 2.0 Working Group. RSC Chair Rep. August Pfluger, R-Texas, directed the working group to "solicit policy proposals from RSC members, conservative allies in the Senate, and conservative grassroots groups."