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THE OBBBA AND BEYOND: ASSESSING FEDERAL POLICY SHIFTS AND THEIR IMPACT ON THE MUNICIPAL MARKET

Matthew Riggle and Kyle Gerberding
Aug 21, 2025
2 min read

Updated: Sep 5, 2025

While the municipal bond market avoided one of the biggest threats, an elimination of tax-free financing, there are, and will be, many ripple effects stemming from the One Big Beautiful Bill Act (OBBBA), and we will be closely monitoring and managing our clients’ portfolios to continuously adapt.

Tax Exemption

The One Big Beautiful Bill preserved the federal tax exemption for municipal bond interest, maintaining a key advantage for issuers and investors. The exemption remains a foundational pillar of the municipal market, helping state and local governments borrow at lower interest rates while offering investors tax-advantaged income. The decision to leave this benefit untouched provides continued support for municipal credit by preserving issuers’ access to cost-effective financing for infrastructure, education, healthcare, and other essential public services. It also helps sustain investor demand, particularly among high-net-worth individuals and institutions seeking tax-advantaged income. We feel the questions of exemption being put to rest will provide the demand ballast to a market now with some of the highest relative taxable equivalent yields we have seen since 2008.

Medicaid Cuts

Perhaps the most consequential change for the municipal market will be the cuts to Medicaid and their implications for the shifting costs to states and local governments. The OBBBA significantly shifts Medicaid policy by transferring approximately $219 billion in Medicaid and SNAP costs to states over the next decade. Key changes include tighter eligibility requirements and caps on provider taxes, with expansion states facing a phased reduction in provider tax rates from 6% to 3.5%. These changes could reduce federal matching funds and strain state budgets, particularly in high-utilization states such as California, New York, and Texas. Hospitals may face lower reimbursements and increased charity care burdens, while states may be compelled to explore new revenue sources or restrict benefits to close funding gaps.