I'm Ann Ferentino. I am a Portfolio Manager and a Senior Analyst at Federated Hermes.
How might Biden Administration tax proposals impact the muni market?
Tax reform under a Biden Administration means higher taxes, which increases the value of the tax exemption on muni income. President Biden has proposed big spending on infrastructure and tax reform is expected to be a way to pay for it. President Biden has not formally suggested raising the individual income tax rate to the 39.6 maximum rate since becoming president, but with more than 70% of the muni market being made up of retail or individual investors, just the fear of higher taxes for individuals appears to be boosting demand for munis. Given the positive flows we are experiencing, in fact, after 14 weeks we are now at record level inflows year to date into munis. In his infrastructure plan, the American Jobs Plan, President Biden has unofficially unveiled a plan to increase the federal corporate income tax rate from 21% to 28%. This means that that portion of our market made up of banks, insurance companies and other corporate investors that went away from our market as a result of the tax cut and Jobs Act of 2017 could return increasing demand for munis. This expectation of higher taxes has also resulted though in rich valuations for tax exempts relative to taxables, but we don't see this relative value measurement changing much anytime soon as municipals to US treasury outperformance continues. And we also expect that muni credit will continue to outperform as muni credit quality continues to strengthen with the rollout of the vaccines and the opening of US economy and with muni sectors receiving additional money from the stimulus.
Disclosure: Views are as of April 13, 2021 and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Past performance is no guarantee of future results. Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices. Municipal bond income may be subject to the federal alternative minimum tax and state and local taxes. Federated Investment Management Company 21-30189 (4/21)