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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.

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

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