Three reasons why the Senate race matters for municipal bonds

Taxes, infrastructure spending, and the use of executive orders are key issues for muni investors

As we enter the final month of 2020, the United States has a President-Elect, Joe Biden, and a Democratic House of Representatives. But we lack clarity on which party will lead the Senate. It all comes down to two runoff elections in Georgia on Jan. 5. If both Democratic challengers win, then Biden’s party will control the 50-50 Senate (thanks to the tie-breaking powers of the vice president). If at least one of the Republican incumbents wins, then the Senate will remain in GOP hands in a 51-49 split. Below, I highlight three ways the Senate could affect Biden’s presidency and the municipal bond market.

1. Taxes:  Little to no change in a divided government

With the odds against the Democrats winning both Senate seats in the Georgia runoff, the Biden administration will likely have to work with a Republican Senate majority to navigate various tax policy issues in the coming year. 

Biden has proposed raising the top individual tax rate from the current 37% to 39.6% (for households earning $400,000 or more), and the top rate on long-term capital gains and qualified dividends from 20% to 39.6% (for taxpayers earning more than $1 million).1 However, the Biden tax plan was largely dependent on a “blue wave” of Democrats picking up a large number of seats in the 2020 election.  Since this didn’t happen, the Biden administration will likely have to reconsider its tax proposals. The current economic conditions make tax hikes an unattractive option in the short run, and a Republican-held Senate would make it less likely that there will be Congressional interest in large tax increases.

Bottom line: It was estimated that a blue wave could have resulted in $2.1 trillion of increased tax revenue over the next 10 years.2 That is now unlikely — but it doesn’t mean that taxes will go down, which means that the tax-exempt income provided by municipal bonds may continue to be in strong demand. 

2. Infrastructure:  Rare common ground

Infrastructure seems to be the one topic that a potentially divided government may be able to agree on.  Communities across the United States face a severe shortage of affordable homes and a growing need to repair, replace, and modernize their critical infrastructure — roads, rails, bridges, drinking water and wastewater systems, ports, airports, civic buildings, broadband, and more.

The Biden team’s infrastructure plan involves a $2 trillion accelerated investment over four years, with funding and jobs spread out across blue and red states.3  The plan is expected to provide flexible federal investments to state and local government transportation departments, with the goal of providing every American city with 100,000 or more residents with high-quality, zero-emissions public transportation options.

Bottom line: We expect the municipal bond market to be one of the various funding vehicles used to finance the expansive infrastructure improvement project. This would be a net positive for state and local government fundamentals as increased federal funding would lead to better employment, economic conditions, and tax receipts. 

3. The executive order: A potential side street to escape the gridlock

It’s not a far reach to assume that in a potentially divided government, the powers of the president would be considerably lessened.  This is why the executive order may end up being one of the most important tools of the Biden presidency. President Obama signed 276 of them in the eight years of his presidency; President Trump signed 192 of them in four years.4  Biden could, and we expect will, follow suit.

Bottom line: While Biden will likely not be able to enact the entirety of his tax plan with a divided Congress, he could use the power of the executive order to raise taxes in specific areas or to reinterpret regulations tied to the 2017 Tax Cuts & Jobs Act. That could boost demand for municipal bonds. 

1 Source:, “Details and Analysis of President-elect Joe Biden’s Tax Plan,” Oct. 22, 2020

2 Source: Tax Policy Center, “An Updated Analysis of Former Vice President Biden’s Tax Proposals,” Nov. 6, 2020

3 Source:, “The Biden plan to build a modern, sustainable infrastructure and an equitable clean energy future”

4 Source: The American Presidency Project, “Executive Orders”

Important information

Blog header image: Markus Thoenen / Getty

All investing involves risk, including the risk of loss.

Municipal securities are subject to the risk that legislative or economic conditions could affect an issuer’s ability to make payments of principal and/ or interest.

Invesco does not offer tax advice. Please consult your tax adviser for information regarding your own personal tax situation.

The opinions referenced above are those of the author as of Dec. 4, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

Stephanie Larosiliere is the Head of Municipal Business Strategies and Development for the Invesco Municipal Bond team. Ms. Larosiliere works with the fund management team, acting as its representative to retail clients and other intermediaries.

Her responsibilities include working with sales staff and clients to provide insight on the municipal fixed income market and the investment strategies utilized by the team. She is also responsible for ongoing product development and marketing for the municipal bond products.

Ms. Larosiliere joined Invesco in 2011 as a senior product manager supporting the municipal and convertible businesses. Prior to joining Invesco, Ms. Larosiliere served as a vice president in the Goldman Sachs Asset Management fixed income product management team where she was responsible for portfolio analysis, product development, client retention and marketing. Prior to joining Goldman Sachs in 2008, she worked as an institutional product management associate for Brown Brothers Harriman. She began her career in the industry in 2003 as a risk management analyst with JPMorgan Chase where she was responsible for performing daily value at risk (VaR) analysis and monthly stress risk tests on the bank’s credit portfolio.

Ms. Larosiliere earned a BBA degree in finance and investments from Baruch College — The City University of New York (CUNY).

1 Not involved in managing assets of any fund.

|3 min readPosted inFixed Income
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