What Trump’s Presidency Means for Municipal Bonds

President-Elect Trump announced a broad and ambitious agenda during his campaign. While campaign promises don’t always translate into policy, we assess below how some of his proposals might impact the municipal market. Regardless of whether these impacts are positive or negative, it’s important to note that federal policy changes affect all sectors of the municipal market—a testament to its inherent strengths. Even as federal priorities shift every four to eight years, municipal bonds have consistently offered stable and reliable investment opportunities.

Federal Tax Policy

The Municipal Bond Tax Exemption: This tax exemption, like many others, appears more vulnerable to us in the face of federal budget challenges and we recommend caution on taking the tax exemption for granted. The Tax Cuts and Jobs Act (TCJA) halted the issuance of tax-exempt pre-refunding bonds, and additional legislation could likewise cause another sub-set of municipal debt to become taxable. We do not expect any changes to impact existing debt in the event of any changes. As uncertainty increases on this subject, we could see an increase in issuance before an anticipated loss of the product.

SALT deduction: Another hit from the TCJA is that this law caps state and local tax deductions at $10,000. The President-Elect commented in NY this fall that he would “get SALT back.” When state and local governments evaluate taxing capacity, the SALT deduction is part of the calculation. From a municipal credit perspective, the return of the deduction is positive: residents are paying lower taxes. They can spend more on the economy, and if necessary, there is capacity for tax increases if necessary.

Tariffs: The “If’s” and “How’s” abound on the Tariffs topic. With so little understood on the potential implementation, we do not want to dive deep into the multiple scenarios, but offer these thoughts:

• Tariffs are regressive – akin to a consumption tax. If used to replace a progressive income tax, we should expect an increased need for social support programs paid for by our governments.
• In 2022, the total import Value for Goods was $3.35 trillion. Under existing laws, $112 billion of Duty, Taxes, and Fees were collected – primarily due to tariffs imposed by Trump in his first term.¹
• In 2022, the federal government collected $2.8 trillion in personal income taxes.²

If there are no more personal income taxes, there are no more federal taxes from which municipal bonds will be exempt. However, the numbers above show how difficult it would be to remove the federal income tax completely. If federal income tax rates fall, the tax exemption that municipal bonds provide is lower but still offers a value that would retain investor demand.

Social Security Income is no longer subject to federal income taxes: 60% of people who receive Social Security do not currently pay federal income taxes on their benefits. Depending on total income, up to 85% of social security revenues can be subject to federal income taxes.³ The federal government's income from Social Security appears fairly low from a federal budget perspective. From state and local budget perspectives, exempted this income from federal income tax is a positive, particularly for states with a large retiree population where individuals will have more income to spend in the local economy.

State Priorities

Voters also opined on state and local ballot questions, putting new laws, taxes, and regulations in place. Below, we highlight some of the measures that will impact the municipal market in the near future.

Education

School choice measures failed in Colorado and Kentucky, keeping state dollars in the public domain. Traditional public school and charter school funding will not change.

Utah overwhelmingly approved a constitutional amendment increasing annual distributions from the State School Fund from 4% to 5%. The additional funding will benefit public education.

Taxes

Illinois posed an “Advisory Question” to take the temperature on residents’ opinion on creating a second tax bracket taxing personal income over $1 million an additional 3%. While the state's feedback supported the new tax bracket, any tax changes are not automatic. Recall that Illinois municipal bonds are not tax-exempt for state residents.

Voters in Washington State decided to continue applying the state's two-year-old capital gains excise tax, which has collected $1.2 billion so far.

(This is not a ballot vote, but while we are here, Louisiana’s House Ways and Means Committee passed a bill that would change the state’s graduated personal income tax rates to one 3% flat tax. It passed a second bill to eliminate the state’s corporate franchise tax. The bills must pass through additional votes before the taxing methodology changes in the state.)

Climate

A Washington State ballot measure to repeal the state’s Climate Commitment Act, which uses a “cap and invest” program to reduce greenhouse gas emissions, was rejected. The act will remain in place.

California voters approved a $10 billion bond measure to boost climate resilience. Funds are expected to support safe drinking water, wildfire prevention, drought preparedness, and clean air preservation. The market currently welcomes California’s new issuance.

Honolulu, Hawaii, Louisiana, and South Dakota voted on measures that emphasized a need for environmental resiliency and the use of renewable energy sources.

Healthcare

California voters approved directing revenues from an existing tax on managed care health insurance plans to fund Medi-Cal (California’s Medicaid program). The tax is expected to generate $35 billion over the next four years. This might not change how funds are currently budgeted, but as a rule, we aren’t fans of laws that restrict budget independence. California has a history of passing well-meaning laws that stymie the state in budget crunches.

California voters also overwhelmingly approved Proposition 36, “Increase Sentences for Drug and Theft Crimes.” This measure reverses the 2014 Proposition 47, which reduced prison overcrowding. Proposition 36 also created “treatment-mandated felonies”: if charges are not contested, a drug treatment program can be provided instead of jail time. This removes a vital revenue stream used for mental health and addiction programs in the state, some of which have municipal debt outstanding.

New Supply

Voters nationwide approved referendums for over $50 billion of new debt issuance to support infrastructure and construction. Expensive plans to improve infrastructure were first put on hold when COVID-uncertainty broke down supply chains. Inflation then rendered project and borrowing costs unaffordable. In 2024, a falling rate environment unleashed a wave of new issuance, and we expect this to continue at a strong pace into 2025.

Takeaways

The potential for evolving policies under a Trump presidency could bring significant shifts to the municipal bond market, from tax adjustments to social program funding changes. However, while federal policies and economic measures play a role, the priorities seen in recent local elections reveal the unique resilience of the municipal market. Voters have spoken on issues ranging from education and healthcare to environmental protection, shaping how local governments allocate resources and raise funds through debt issuance. These ballot decisions underscore that, even amid national uncertainty, local governance remains a powerful and stabilizing force, helping municipal bonds maintain their status as a stable investment option. Investors should stay informed and watch for legislative developments, but the market’s long-term strength and adaptability to shifting policies provide a measure of confidence for the future.

Considering the likelihood of evolving federal policies and a set of diverse state-level initiatives, investing in municipal bonds remains a prudent strategy for those seeking tax-exempt income and portfolio stability. Navigating the complexities of individual municipal bonds—such as assessing credit quality, managing interest rate risk, and ensuring adequate diversification—can be challenging. VanEck's municipal bond ETFs offer a streamlined solution to these challenges.

VanEck's municipal bond ETFs provide a comprehensive, efficient, and flexible approach to municipal bond investing. They are a compelling alternative to purchasing individual bonds, especially in a dynamic policy environment.

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