(Bloomberg) -- In March, a conservative think tank floated repealing the tax break that state and local governments use to induce investment in their debt, a move that would wreak havoc on the $4 trillion municipal-bond market.

The report by the American Enterprise Institute had a surprising co-author: Donald Schneider, deputy head of US policy at Piper Sandler Cos., one of the top investment banks for municipalities in the US. 

“The current exemption for municipal bonds provides an inefficient subsidy for state and local government infrastructure projects,” according to the report by Schneider and Kyle Pomerleau, who is a senior fellow at the American Enterprise Institute.

Repealing the tax-exemption was cited as a way to help make former President Donald Trump’s 2017 tax cuts permanent. Any call to eliminate the tax break is seen as a major threat within the muni market, where governments finance key infrastructure projects like airports and transit. 

Piper Sandler is ranked as the 10th biggest underwriter of state and local debt so far this year, according to data compiled by Bloomberg. The bank works on deals around the US, while also providing other investment banking services like working on initial public offerings. Schneider is part of the bank’s macro research team, whose views are independent, according to Nick Lawler, a Piper Sandler spokesman. He declined to comment on behalf of the bank and Schneider.

Industry Pushback

Schneider was previously the chief economist for the House Ways and Means Committee, the tax-writing committee, and served under Republican Chairmen Kevin Brady and Paul Ryan.

The AEI report offered two options to extend the tax cuts in a “revenue-neutral, pro-growth manner.” The elimination of the tax-exemption on municipal bonds was included as part of one of the two options laid out in the report. 

The mere proposal to end this financing tool established in 1913 and used by state and local governments to pay for roads, schools and various infrastructure projects is alarming to market participants. 

Read more: Muni Bond Issuers See Tax-Exemption at Eternal Risk: Joe Mysak

“It’s frustrating,” Emily Brock, director of the Government Finance Officers Association’s Federal Liaison Center, said in an interview. “It feels a little like Groundhog Day. It feels like we’re constantly having to every year every time talk about the value of the exemption.”

Municipal Market Analytics, an independent research firm, said in a note on April 1 that the AEI report is “hostile to state and local governments generally.” The firm noted that the report described local government services as essentially just being subsidized by the federal government.

“Amid this kind of rhetoric, the AEI authors can casually recommend getting rid of the tax exemption,” Matt Fabian, MMA partner, wrote in the report.

In a note last week, Tom Kozlik, a strategist at Hilltop Securities, a municipal bond underwriter, called for the muni industry to make the case for the tax exemption. 

“The public finance community should escalate support for tax-exempt bonds by educating (or continuing to) and informing D.C. lawmakers now,” Kozlik wrote. 

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