Republicans Hatch Plan That Puts Muni-Bonds in Jeopardy
Ask any bank robber why he did it and he’ll likely answer…
“I’ve got bills to pay, and I needed fast money.”
Such is the twisted decision-making of people in desperate circumstances.
Today, I’ll prove that broke governments can behave just as irrationally as broke people.
As the U.S. debt nears $20 trillion, Republicans on Capitol Hill just hatched a plan to help pay down the debt — they’re threatening to cut the tax-exempt status of municipal bonds.
Under the current U.S. tax code, individuals and corporations that own bonds are generally required to pay taxes on their interest income. However, since the enactment of the federal income tax in 1913, interest on state and local bonds has been tax-exempt.
If the Republicans follow through on their threat, the move could put an extra $617 billion into Uncle Sam’s pocket over the next decade.
The muni-bond market is one of the last remaining lifelines of cash-poor urban centers around the United States.
Although largely unreported by the press, municipal bonds have financed revitalization projects to the tune of $1.65 trillion over the last 10 years.
Yet in a world where municipal bonds have lost their luster, how will local governments raise financing for schools, roads, bridges, damns, sewer systems, airports and other critical infrastructure?
Please understand that what’s happening is far from novel…
The first municipal bond was issued by New York City in 1812 to fund a canal.
It took 83 years for the Feds to desire a piece of the pie.
But the Supreme Court’s 1895 ruling — a ruling that protects municipal bonds from being taxed by the federal government — still endures today, despite many challenges throughout the years.
Let’s hope that municipal bonds can survive this latest challenge, too.
Either way, America’s infrastructure is in shambles.
You’ll recall that President Trump touted that he’d stimulate the economy through infrastructure spending.
I asked my senior analyst, Martin Hutchinson, for a status report on Trump’s claim.
Click below for the details.
Investment Director, Wall Street Daily
Question: Martin, President Trump believes that he can stimulate economic growth through infrastructure spending. Now, I have two concerns: 1) Can he, indeed, help the economy with such a plan? 2) Are there ways a portfolio could prosper as a result? Martin, can you get us up to speed on what’s happening?
Martin Hutchinson: Yes, indeed, he wants to have a big infrastructure program to boost the economy. The administration has put out a list of 50 pending infrastructure projects totaling $137 billion. There’s a problem here, which is that infrastructure is basically too expensive.
Their list, for example, includes the extension of the Second Avenue subway in New York — which is by far the most expensive subway project in the world, at $3 billion a mile. It’s going to go from something like 96th to 125th Street and cost $6 billion.
The tunnel under the Hudson — the new one, the Holland Tunnel, which was built in 1927 — cost $700 million in today’s dollars. The proposed new tunnel, which as far as I can tell is identical — two lanes of traffic each way — is going to cost $10 billion. And that estimate keeps rising. Even the proposed wall on the Mexican border — the estimate’s risen from $10 billion to $20 billion in the last month.
Question: That sounds excessive. Is the president’s plan ill-fated?
Martin Hutchinson: The one advantage is having this particular president because, of course, he’s a builder. The problem is not identifying infrastructure projects. There are lots of those, and most of them are pretty sensible.
It’s preventing them from costing too much. The big problems seem to be lawsuits — from people who don’t want it to go across their land or whatever — and environmental requirements where you have to do study after study before you can build anything.
Trump’s a builder. He understands these problems. With the help of Transportation Secretary Elaine Chao — who is Sen. McConnell’s wife and should be able to get things through Congress — he can propose legislation to lower infrastructure costs. One simple thing, for example, is to repeal the 1931 Davis-Bacon Act that says federally funded infrastructure projects have to be built with union labor. He’s buying American things fine because infrastructure is basically a bunch of heavy stuff. There’s no reason why you shouldn’t buy that with local contractors and such — rather than importing it. He can certainly reduce costs a bit using his own expertise.
Question: Hutchinson, is there a chance he’ll actually pull this off?
Martin Hutchinson: I think he can reduce the cost a bit. And he’s clearly going to try to do it whether he can or not. The macro effect will probably be inflationary, because the budget deficit’s already too big — and more military spending will make it bigger. There’s clearly going to be some substantial amount of actual infrastructure built.
Question: How do we make money off this? Is there an opportunity here too?
Martin Hutchinson: I think there is. The iShares Global Infrastructure ETF (IGF) is a $1.4 billion fund. And it yields a pretty nice 2.9%, with only 0.47% of expenses. So it doesn’t look overpriced. I think that’s likely to do pretty well with the big infrastructure spend coming up.
Question: Thanks for your time today, Martin.
Martin Hutchinson: Great. Pleasure being with you.
Question: This is Wall Street Daily signing off.
Senior Analyst, Wall Street Daily