The ‘One Big Beautiful Bill’ Act: Implications on the municipal bond market
August 26, 2025
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The “One Big Beautiful Bill” Act (OBBBA), a budget reconciliation bill, brought growing uncertainty to the investment market for municipal bond tax exemptions. Passed in 2025, the OBBBA arrives as several provisions of the 2017 Tax Cuts and Jobs Act (TCJA) were set to expire. For now, investors may rest a little easier knowing that the final version of the bill, signed by President Donald Trump, leaves untouched the tax exemption for municipal bond interest.
While this is a current safeguard, it is not the first time bond tax exemptions have been at the center of legislative debate. In 2017, the House approved a budget reconciliation bill for the Tax Cuts and Jobs Act (TCJA that proposed eliminating tax-exempt private activity bonds. Markedly, the bill was later revised and ultimately preserved the tax-exempt status of private activity bonds. While the focus was on private entities and their tax exemptions, the proposal triggered potential future changes to both private and public bond exemptions.
This year, with many of the TCJA provisions set to expire, the OBBBA serves to reinforce existing protections for municipal bond investors and their interest tax exemptions. Although the exemption remains intact, there may still be implications for the municipal bond market moving forward.
Traditional Municipal Bond Funding Faces Dampened Taxpayer Support
The OBBBA’s 2017 counterpart capped the state and local tax (SALT) deduction to $10,000. Since a key determinant of property tax cost is its federal tax deductibility, the SALT deduction limitation led to significantly decreased numbers of taxpayers who could claim it and the total amount of tax savings generated from it. This negatively influenced residents’ willingness, especially in high revenue areas, to support real estate tax increases, and therefore limited local governments’ ability to rely on traditional tax revenues to fund municipal bonds.
Since the OBBBA will increase the SALT deduction from the current cap of $10,000 to $40,000 for taxpayers with an annual income of less than $500,000, the ability for municipalities to increase taxes once again may be back on the table. With a higher annual income limit, however, this may offer limited benefit for certain municipalities as the higher cap will most likely benefit high-income earners. Although this is a viable option, local governments will face a high tax-resistant hurdle in regaining taxpayer support.
The OBBBA SALT Deduction Cap May Continue to Influence Municipal Bond Supply and Demand
Given the taxpayer hurdle, the TCJA cap subsequently increased demand for municipal bonds in high-tax states. Due to the limited deduction, individual investors turned to investing in municipal bonds for federal tax relief. Even with the implementation of the OBBBA, demand for municipal bond issuance has continued to soar and “is on track to be the highest since 2010,” following the expansion of private activity bonds under the American Recovery and Reinvestment Act of 2009. Despite the OBBBA’s raised SALT deduction limit, the demand for private investing in municipal bonds will likely remain constant, if not increase.
As with any increase in demand, there may be an impact on supply. While the years immediately post TCJA saw an ebb and flow in supply, October 2024 marked a record $480 billion in new capital municipal bond issuance. With the upward trend in issuance, it is unlikely that the OBBBA will negatively impact the supply of municipal bonds, as there continues to be a push for new infrastructure and a response to reductions in other traditional forms of funding.
Public Institutes of Higher Education May Need to Reevaluate
With OBBBA’s passing, public colleges and universities may be impacted by the bill’s diminished capability of federal funding for students. The timing quickly follows proposed research budget cuts that many higher education institutions are currently navigating. These combined reductions may lead public higher education institutions to explore alternative revenue-generating strategies to maintain financial stability.
As these institutions consider new ventures, they should carefully evaluate any third-party rental or leasing contracts. There are restrictions on the amount of bond-financed property that may be used for private purposes. If the third-party use does not qualify under the rules for private activity bonds, the interest on that portion of the financing may lose its tax-exempt status.
Conclusion
After the signing of the OBBBA, and aside from some anticipated shifts in the municipal bond market, such as changes in investor demand and local funding strategies, the tax exemptions for municipal bonds remain intact. This is a positive outcome, considering that tax-exempt bonds “are a fundamental and important intergovernmental partnership between the federal government and communities.” With the continued demand for infrastructure and municipal improvements, it is unlikely that the tax exemption will be eliminated anytime soon.
Eliminating the exemption would have wide-reaching consequences for the municipal bond market and American taxpayers that significantly outweigh the federal government’s projected tax revenue gain. The Joint Committee on Taxation estimated that the exclusion of interest on state and local bonds cost the federal government approximately $25 billion in tax revenue for 2024. However, the repeal could increase annual borrowing costs for state and local governments by an estimated $82 billion.
Reprinted with permission from the August 21, 2025, edition of The Legal Intelligencer © 2025 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
