Boost seen for U.S. muni market from post-election tax hikes -Citi

CHICAGO, Sept 28 (Reuters) - The U.S. municipal bond market would benefit from higher taxes either under a Democratic sweep of the White House, Senate and House, or to a lesser extent, if the coming election results in a second term for President Donald Trump and a continued split Congress, a Citi research report said on Monday.

Under either scenario “taxes will be going up one way or the other,” according to Citi.

States, cities, schools and other issuers sell debt in the $3.9 trillion muni market that attracts mainly higher-income investors due to an exemption from federal income taxes and at times from state and local taxation as well.

A Nov. 3 win for Joe Biden and Democratic control of Congress would bring quick action on “substantial” federal aid for state and local governments, which are facing steep revenue losses due to the fallout from the coronavirus pandemic, according to the report.

A Democratic sweep could also lead to reversals of the 2017 Tax Cuts and Jobs Act, likely increasing tax rates for high earners and corporations, and removing the cap on deductions by individuals for state and local taxes they paid.

“Simply put, a Biden Presidency and Democratic control of the House and Senate would be extremely positive for the municipal market and especially bullish for tax-exempt municipals, in our view,” the Citi report said.

As for the status-quo scenario, the report said “far less generous” federal aid is expected, which will lead to tax hikes by some cities and states to balance their coronavirus-hit budgets.

“The net result will be a higher effective tax-rate for corporations and high-net-worth individuals, which will increase the value of the tax-exemption and increase demand for such paper,” the report said.

The iShares National Muni Bond ETF is up 1.9% so far this year. (Reporting by Karen Pierog in Chicago Editing by Alden Bentley and Matthew Lewis)