More SALT please
Whether you call it a spice or a condiment, SALT has a major presence at the budget table. For those in high tax states, raising the cap to $30,000 from $10,000 only makes a marginal difference. Take the case of a married couple who both work filing jointly in a high tax state. State income taxes would be well in excess of $30,000 if both hold relatively high paying jobs. In many cases, property taxes alone may be in excess of $30,000 in the greater New York region. The challenge is how to offset the cost of a higher break given all of the other benefits being sought. The federal budget arithmetic is daunting. Unless, of course, we want to go into more debt. This is not a policy direction that is desirable.
So if congress also wants to forgo taxes on tips and on overtime, we are in need of more offsets and so on and so on. This pressure is why we keep going back to the possibility of cutting Medicaid benefits. Starting with a work requirement for able bodied single adults sounds reasonable on its face. Requiring Medicaid recipients to pay premiums not as much. What appears to be more punitive is not allowing a person who has been denied Medicaid to even apply for coverage under the ACA. The result will be more people with no layer of medical protection.
In turn what happens is an uninsured individual walks into the emergency room and that case becomes bad debt for the hospital. The hospital is then pressured financially and the cycle repeats. Hospitals are already lamenting that budgets are getting tight especially with the cutbacks in medical research that are conducted in the hospital environment. Layoffs in the sector would follow.
The idea that the states would be able to cover more individuals through any kind of block grant is not necessarily intuitive. Any shifting of costs to the states would result in all states experiencing some level of budgetary pressure. Given Medicaid is either the first or second largest expense in state budgets would lead to some level of reconsideration of their respective creditworthiness.
Whether we have a federal budget proposal before Memorial Day is much less than certain. Fiscal hawks are calling for even more expenditure cuts to bring down the federal deficit and to allow for renewing and making the tax cuts permanent Perhaps, the summer recess will be shorter this year.
The pace of municipal issuance remains robust. Inflows into mutual funds and ETFs are bolstering the market. The increase in the ten year Treasury to 4.43% is moving closer to the high of 5.0%. Many are calling on the Fed to cut rates once again. But the inflation watch is ongoing due to the uncertainties surrounding the tariff regime. Today it was announced that the tariff levels for the nations will be released in the weeks ahead since it is not practical to negotiate with all parties. Most pundits are calling for more easing towards the end of this calendar year.
Despite the higher level of supply in the municipal market, key heavier issuance states are driving the calendar. In a recent forward supply table for the West in The Bond Buyer it was noted that AK, HI, ID, NV, OR, and WY have no planned sales.
The rating adjustment of Maryland by one of the rating agencies is noteworthy. The bridge collapse has caused some pressure. But concerns over federal funding going forward is ponderable. We would not expect much of an effect on pricing unless other agencies also decide to reassess their ratings.
The tax exemption for municipal bonds is untouched at the moment. We can only hope that further budget deliberations do not cause any reconsideration of this status. The proposal to heighten the taxes on endowments is cause for concern. Draw policies on endowments to support ongoing operations may be revisited in light of the proposed change if enacted. Present draw levels may not suffice.
The recovery in the equity markets will probably contribute to more capital gains activity than recently presumed. California recently released a budget gap that in part lays the blame on an anticipated reduced level of capital gains activity. Employment and retail sales remain relatively stable for the moment. Walmart has indicated that there are price pressures that will be reflected in prices soon. Although consumer confidence is lower, the numbers are not reflecting that trend just yet.
John Hallacy
John Hallacy Consulting LLC
Recent Comments