March 14th, 2016
This week we look at the potential impacts of the election on tax and trade policy.
Who’s Going to Win?
The Presidential race is approaching the stage when it becomes appropriate to begin thinking about the potential for policy changes which would impact the municipal bond market.
A first step in this process is to assess the candidates who are most likely to win and the policies they will enact.
Instead of listening to pundits or following polls, we prefer to look to the output of prediction markets. Prediction markets are believed by many to be the most accurate forecaster of election results.
Election Betting Odds compiles Presidential election probabilities from the odds posted on the U.K. gambling site Betfair.com
Percentage Chance of Wining the Presidency
Source: Election Betting Odds
Currently Election Betting Odds estimates that the probability of Hillary Clinton being elected is 66%. Donald Trump’s probability is 20% and Bernie Sander’s is 6%.
Whither Tax Policy?
Because of the dependence of the municipal bond market on the tax-exempt status of its bonds, potential changes in tax policy are a market focus. The candidates’ proposals vary widely. Not surprisingly the Democrats favor higher, more progressive tax rates and the Republicans favor lower, flatter schedules.
An interesting aspect is that most of the proposals do not include an Alternative Minimum Tax. Hillary Clinton wants to retain the current AMT and add a 30% “Buffet tax” modeled on a proposal by Warren Buffet. It is not clear how the Hillary Clinton Buffett tax proposal would deal with municipal bonds subject to the AMT.
All of these are just proposals with uncertain prospects of success, likely to be modified in negotiations with Congress. Unfortunately, Betfair.com does not post odds of passage of Congressional tax bills.
Freer Trade has Few Candidate Supporters
There is more agreement among the candidates on trade policy than there is on tax policy. Almost all the candidates favor policies that place additional restrictions on free trade. Even Hillary Clinton with a previous history of supporting initiatives promoting freer trade, has been forced to tack to a more restrictive position.
We are supporters of freer trade and its economic benefits. We worry that making trade less free could have negative consequences for our national economy. Exports currently account for over 13% of national GDP.
As with any issue impacting the national economy, we also need to look at the potential State level impacts of a tighter trade policy.
States with notable exposure to exports are Washington (20%), South Carolina (16%), Michigan (12%), and Tennessee (11%). As the election draws closer, we think this is a risk factor for States that should be monitored.
Have a Great Week,
Michael Craft, CFA