Cloudy outlook for 2026 legislation and tax policy

Muni bond issuers, academics, attorneys, housing advocates, and lobbyists are looking to 2026 as a year offering more uncertainty about the country's financial future.

"We had one party inside of the beltway for the last year, and while they were able to pass a massive tax overhaul, we haven't seen a whole lot of activity since then," said Emily Brock, director of the federal liaison office of the Government Finance Officers Association.

The effects of the One Big Beautiful Bill Act will start to reveal themselves as tax season kicks off and Congress tries to avoid a possible government shutdown on January 30.

"If the House cannot figure out the solution to (Affordable Care Act) tax credits, we may have to have a reconciliation bill," said Brock. "I think that's the worst-case scenario, because it would be nice for there to be a resolution before they expire."

While a second major budget reconciliation is possible according to the calendar, a fracturing Republican Congress could derail things.

"I fully expect Congressional leadership, especially in the House to at least start the process of a second reconciliation package next year," said Brett Bolton, vice president of federal legislature and regulatory policy at the Bond Dealers of America.

"What's included in this potential package is anyone's guess. I think it's fair to say this vessel would be likely heavily influenced by the conservative wings of the Republican caucus due to their concessions in the first package earlier this year."

"I think the likelihood of a second reconciliation package gaining any traction is limited at best and passage an even lower likelihood."

Assuming a shutdown is averted and Congress can focus on another major piece of legislation, the possibility of a change in the balance of power will complicate things.

"Once the spring comes, honestly even late winter, the midterm elections will become all-consuming and what limited attention is left will be needed for must-pass legislation," said Brian Egan, chief policy officer for the National Association of Bond Lawyers.

Muni issuers remain focused on efforts to restore advance refunding of tax-exempt bonds and raise the cap on bank qualified bonds.

"We know Congress has to tackle surface transportation in 2026, at least in theory," said Egan. "We also know it will have a tax title for fuel tax reauthorizations. It's not easy getting any legislation tacked onto anything these days, but adding pro-municipal bond provisions to something like a surface transportation bill is certainly a logical path."

The focus level and bandwidth capacity in the final months of the 119^th Congress could knock the muni wish list off the calendar.

"It'd be great if public finance entities were able to get that option (advance refunding) back," said Tom Kozlik, managing director, head of public policy and municipal strategy for Hilltop Securities.

"Lawmakers increased the deficit by $4 trillion or $5 trillion in 2025, and it wasn't on the menu. That tells me that it wasn't a priority."

Eliminating the tax exemption on municipal bonds was on the menu earlier in 2025, along with everything else. If a second reconciliation bill did materialize along with more tax cuts, the threat could return.

"If the 2026 legislation does rise and if it does end up being a big, sweeping piece of legislation, and people start talking about serious change, there could be a larger threat to the tax exemption," said Kozlik.

Emerging tax policy and enforcement efforts by the Internal Revenue Service will also bear close watching in the coming year. Scott Bessent, the Secretary of the Treasury, is also the current commissioner of the IRS.

He's being assisted by Frank Bisignano who became the CEO of the IRS in October while also serving as commissioner of the Social Security Administration.

Counting Bessent, there have been six acting IRS commissioners since the start of the Trump administration. The agency received a budget boost during the Biden administration followed by a cut via a continuing resolution.

Since then it's lost personnel, which has many tax lawyers scratching their heads over inexperienced auditors, and nonsensical requests for signatures on forms that were already signed.

"The IRS needs to be supported with proper funding and adequate staffing and given sufficient time to respond to new legislation and to address competing priorities," said Carol Lew, a partner at Stradling Law.

"I am cautiously optimistic that after funding issues, a government shutdown, significant retirements, and a large number of terminations, including at the leadership level, that the IRS will be able to efficiently fulfill its mission of collecting revenue, providing taxpayer service, and providing needed guidance."

Fulfilling its mission while working in changes to the tax code is already creating headwinds between the federal government and the states who have the option of not conforming to the new rules enacted by OBBBA.

Several states have decoupled their tax code from the federal rules much to the chagrin of the Treasury Department, with more likely on the way.

"I'd expect additional states, especially rolling-conformity states, to consider selective decoupling during the 2026 legislative session to protect state revenues," said Lucy Dadayan, principal research associate at the Tax Policy Center, Urban Institute & Brookings Institution.

"States regularly choose which federal provisions to follow, and the federal government has no ability to enforce conformity."

Conformity will depend on what the federal moves are doing to state revenues combined with the coming changes to federal support for social programs.

"The OBBBA's mix of tax provisions and reductions in federal Medicaid and other program funding will start to surface in state tax policy debates and state fiscal year 2027 budget discussions, adding pressure to both revenue forecasts and spending plans," said Dadayan.

"Many states will need to revisit assumptions and make policy or budget adjustments as they absorb lower federal support while maintaining existing commitments."

OBBBA also changed the game for affordable housing development by easing restrictions on Low Income Housing Tax Credits, which rely on private activity bonds.

More pro-housing legislation is percolating in both house of Congress.

"Now that housing legislation has passed out of the House Financial Services Committee and the full Senate, it seems likely that at least some form of housing legislation will pass the full Congress before the midterms," said Emily Cadik, CEO of the Affordable Housing Tax Credit Coalition.

"There is stiff competition for floor time from government spending bills, and election year politics can often get in the way of meaningful legislation, I am optimistic that housing legislation still has enough support and interest to get across the finish line in 2026."

It may be too early for making predictions about the midterm elections, but both parties are applying focus to affordability.

"From the president's recent remarks to campaign ads already airing in congressional and gubernatorial races around the country, the high cost of housing and voters' demands that elected officials address them, will be a major theme of 2026," said Stockton Williams, executive director, of the National Council of State Housing Agencies.