Taxes Are on the Ballot. That Could Be Bad News for Muni Bond Investors.

The first day of early voting in Texas for the midterm elections, in Houston, on Oct. 19. (Ronaldo Schemidt / AFP via Getty Images)

Affordability is the buzzword heard throughout this election season, but it isn’t confined to the midterm congressional contests. At the state level, an array of pocketbook propositions are on the ballot—and they don’t concern just the constituents voting on the questions. Their outcome could also affect far-flung investors in municipal bonds issued in those states and localities.

Many propositions are aimed at capping taxes, which has obvious appeal to those paying them but could undercut the revenue that pays the interest and principal on bonds that fund public services and infrastructure. Other voters are being asked to approve or extend levies on the wealthiest taxpayers, which could bolster funding for public purposes but also induce the rich to exit for more tax-friendly climes.

Of the latter, California’s so-called billionaire tax has gotten the most notice. The Golden State’s Proposition 40 would impose a one-time 5% tax on assets over $1 billion to help fund healthcare, education, and food-assistance programs.

On the opposite coast, Florida voters will consider the “Save Our Homes From Excessive Property Taxes” amendment. That would increase the “homestead exemption” to $250,000 by 2028, from $50,000 currently.

These two high-profile propositions exemplify the principle made famous decades ago by Sen. Russell Long, a powerful Louisiana Democrat who headed the Senate Finance Committee from 1966 to 1981: “Don’t tax you, don’t tax me, tax the fellow behind the tree!”

The California billionaire tax would obviously hit just the few in this rarefied cohort, with the equally obvious intent to redistribute part of their wealth.

The Sunshine State’s property-tax exemption would be reserved for Florida residents who have owned their homes for at least five years. So, new residents, or those with Florida vacation homes (and thus don’t vote there), are left out of the largess.

As for bond investors, the impact of such schemes is uncertain, even if they gain voter approval.

There may be an estimated 200 billionaires in California, Dan Close, head of municipals at Nuveen, told Barron’s, but added that he doubted they all would leave. One who may opt to stay put is Meta Platforms CEO Mark Zuckerberg. Terms of Meta’s creation of a new Class C stock announced this past week would give Zuckerberg more than $20 billion of these shares, which he could sell to pay the proposed California wealth tax without diluting his control of the company.

While passage of the billionaire tax would give a one-time boost to California’s budget, Nuveen estimates a reduction of slightly less than 1% in future income taxes, Close said. That would result from the departure of the ultrawealthy to lower-tax states or countries.

In actuality, California’s Proposition 3 may have more important fiscal impact than the more-publicized billionaire tax, according to Tom Kozlik, head of public policy and municipal strategy at Dallas-based HilltopSecurities. That proposal would indefinitely extend the top marginal state income-tax rates of 10.3%−12.3% to fund education. Meanwhile, the one-time proposed billionaire levy currently has long odds of getting voted in. Democratic Gov. Gavin Newsom has come out against it (possibly with an eye on a presidential run in 2028). And prediction sites Kalshi and Polymarket this past week put the probability of passage in the low-20% range.

In Florida, Kalshi and Polymarket also have the property-tax exemption proposal falling well short of the required 60% supermajority needed for it to pass. The higher homestead exemption is being sold as a property-tax reduction, though it would also have the effect of taking away funding from areas other than education, said John Mousseau, chief investment officer at Cumberland Advisors in Sarasota.

The effects of tax restrictions would hit various areas differently. For instance, Nuveen’s Close observes, the Port St. Lucie area, with a higher proportion of residential real estate valued closer to the proposed exemption level, would be hit harder than Miami-Dade County, with much pricier real estate and more commercial property. Mousseau added that the tax curb would hamper funding of infrastructure needs brought on by the influx of new residents attracted by Florida’s lack of an income tax.

It’s understandable that Americans suffering from high prices and stagnant pay would want to seek tax relief at the ballot box. For muni investors, however, that undermines the backing of tax-supported general obligation, or GO, bonds. Mousseau added that in the rare cases of municipal bankruptcies, as seen in Puerto Rico and Detroit, the GO bondholder was treated as an unsecured creditor by the court.

One way to avoid that dilemma is for muni investors to favor revenue bonds backed by essential services and not subject to the politics of taxes. For instance, both Close and Mousseau said that investors could opt for New York City Municipal Water Finance Authority revenue bonds, with a higher credit rating, instead of New York City GOs, if they are wary of the city’s Democratic Socialist mayor, Zohran Mamdani. In a similar vein, Close suggests San Francisco Public Utilities Commission Water Revenue bonds as a possible substitute for City and County of San Francisco GOs.

Former House Speaker Tip O’Neill famously observed that all politics is local. So is investing in muni bonds.

Write to Randall W. Forsyth at randall.forsyth@barrons.com

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