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Tax Reform Shakes Up the Muni Market Landscape

The debate over tax changes sparked a record amount of muni market activity at the end of 2017 and the impact of the final bill will be felt for months ahead.

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The passage of the largest overhaul of the U.S. tax system in decades dominated headlines in December 2017. The process provided a wild ride for muni market participants and its longer-term impact is still up for debate. But as we’ve talked to portfolio managers since then, it’s become clear that most aren’t expecting a disaster for muni investors, although there have been some big changes.

What Happened?
Early versions of the bill included the elimination of the tax exemption for both private-activity bonds and advance refunding bonds, keeping both muni issuers and buyers on edge. Private-activity bonds provide vital project financing for various types of facilities including nonprofit hospitals, utilities, multifamily housing units, and charter schools. As PABs account for an estimated 20% to 30% of the overall muni market, and advance refunding bonds generally compose 10% to 25% of annual muni bond issuance, disallowing either financing tool was expected to have an outsize impact on muni participants.

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Elizabeth Foos does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.